JPMorgan Warns Dollar Dominance Faces Risks From Political Instability, US-China Tensions

JPMorgan has warned of the risks to the U.S. dollar’s dominance from escalating U.S.-China tensions and political instability. The global investment bank’s strategists anticipate “partial de-dollarization,” in which the Chinese yuan gradually assumes a more significant role in global trade.

JPMorgan on De-Dollarization Threat

Global investment bank JPMorgan has warned that the dominance of the U.S. dollar could be at risk due to rising tensions between the U.S. and China, as well as concerns about political instability within the United States.

The firm’s strategists, led by Jan Loeys and Joyce Chang, explained in a report published on Tuesday that the markets are not adequately factoring in the risk of a “rapid and deep” decline in the U.S. dollar’s status as the preferred currency for global reserves and trade. They detailed:

If U.S.-China tensions intensify and we get more global fragmentation, it would likely lead to de-globalization in trade and finance … In finance, it could also lead to de-dollarization.

The strategists pointed out that the main factor that could jeopardize the dollar’s dominance is the political dysfunction within the U.S. They cautioned that this dysfunction could hinder efforts to manage the national debt and prevent the government from stabilizing the economy during a crisis. The U.S. recently averted defaulting on its debt obligations at the last minute as politicians sparred over debt ceiling limits.

Moreover, the JPMorgan strategists emphasized the potential danger arising from an intensifying rivalry between the U.S. and China, which they described as a possible “Cold War 2.0.” They noted that China’s ambitious economic reforms, which include measures like easing capital constraints and promoting market liquidity, could erode the dollar’s dominance.

JPMorgan has also warned that a shift away from the U.S. dollar or destabilizing shocks to its value could have broad consequences across multiple asset classes. The bank noted that this could lead to a decrease in the dollar’s value, lower equity multiples, and higher bond yields.

While the USD may lose its dominance, the strategists believe that it is unlikely to be completely replaced as the primary reserve currency within the next decade. Instead, they anticipate a more plausible scenario of “partial de-dollarization,” in which China gradually assumes a more significant role in place of the greenback among nations that are not aligned with the U.S.

Various individuals, including S&P Global economist Paul Gruenwald, have foreseen the potential decline of the dollar’s dominance. Nobel laureate Paul Krugman also recently said the dollar’s dominance won’t last forever but he doubts that the Chinese yuan could replace the greenback.

Do you agree with JPMorgan’s strategists about the risks to the U.S. dollar’s dominance? Let us know in the comments section below.