The Blubber

The US dollar can't be dethroned as the world's dominant currency, according to Morgan Stanley.

Morgan Stanley's recent report indicates that the U.S. dollar's status as the dominant global reserve currency is likely to persist. Despite discussions about alternatives, such as the Chinese yuan, these competitors are not seen as credible challengers at this time. Factors like China's "3D challenge" of debt, deflation, and demographics are expected to limit the yuan's international appeal, with predictions that yuan reserves may only rise to 5% by 2030 from the current 2.3%.

The report acknowledges that recent events, such as geopolitical tensions, U.S. fiscal concerns, and debates over the debt ceiling, have put the dollar's dominance under scrutiny. However, Morgan Stanley does not anticipate a significant change in the dollar's status soon. While some countries might seek alternatives due to U.S. sanctions and fiscal outlook concerns, these alternatives are difficult to establish.

Global currency reserves, exceeding $12 trillion, and the vast scale of global trade and cross-border bank lending suggest that even minor shifts can have substantial impacts. The report anticipates only a moderate decline in the dollar's international use, despite rising multipolarity and low diversification costs for reserve managers.

Morgan Stanley also notes that periods of dollar weakness are expected, particularly with the upcoming U.S. presidential election potentially testing the currency's status. Nonetheless, recent factors like sticky U.S. inflation, a resilient economy, and heightened Middle East tensions have strengthened the dollar, with the currency reaching significant highs against the yen and the euro recently.