Morgan Stanley has thrown its weight behind the continued dominance of the US dollar as the world’s primary reserve currency. Despite mounting debt levels in the U.S. and an uptick in global geopolitical risks sparking some debates, the finance giant reported on Thursday that the greenback is poised to hold its ground. The dollar’s resilience is noted particularly due to the lack of strong contenders like the Chinese yuan.
As geopolitics change and debates about the dollar’s premier position wax and wane, some reserve managers have indeed been flirting with diversification. Still, Morgan Stanley’s recent analysis is clear.
“We expect USD’s dominant reserve currency status to endure despite ongoing challenges from an increasingly multipolar world.”
According to them, the dollar will enjoy sustained preference and support, even though it may face some cycles of weakness due to economic conditions and market valuations.
BRICS’s Failed De-dollarization Effort
The BRICS has been pushing to knock the US dollar off its reserve currency pedestal by promoting local currencies for international trade. Leaders from China and Russia have traveled extensively, advocating for the use of native currencies over the US dollar among developing nations. This effort saw initial enthusiasm, suggesting a possible shift in global currency dynamics.
However, this de-dollarization drive hasn’t made the dent it aimed for. The DXY index, which measures the US dollar against a basket of other major currencies, demonstrates the dollar’s robust performance, currently trading at around 106.27—a notable rise from a low of 101.8 earlier in the year.
This strength is highlighted as the dollar continues to overpower the currencies of the BRICS nations, one by one. The Chinese Yuan, for instance, dropped to a five-month low of 7.24. The Indian Rupee hit a historical low, plunging to 83.63, although it saw a minor recovery to 83.54. Meanwhile, the Russian Ruble has deteriorated, now trading at 94.15 after dipping below 100.
Moreover, the dollar has significantly impacted other major currencies. It forced the Japanese Yen to its lowest since 1990 and drove the British Pound to a four-month low of $1.25. These movements underscore the dollar’s sweeping impact across global currency markets, despite ongoing de-dollarization narratives.
Geopolitical Tensions and the Oil Equation
Recent developments in the Middle East have made things even more complex. Following over 300 missile drone attacks by Iran on Israel, which were intercepted by Israel’s Iron Dome, tensions have escalated, underscoring the volatile geopolitical climate. In this context, BRICS has been urging Middle Eastern nations to abandon the US dollar in oil trading, aiming to weaken its global stance.
Russian President Vladimir Putin has been vocal, suggesting that moving away from the dollar in oil transactions could critically impact both America and Israel. This year, BRICS expanded to include oil-rich countries like the UAE, Egypt, Ethiopia, and Iran, enhancing its influence in the global oil and energy markets. The potential addition of Saudi Arabia could further empower the bloc.
Despite these maneuvers, the dollar remains the favored currency for oil and gas transactions worldwide, with only a minor role played by local currencies. Putin’s stark warning stands out: “If oil producers in the Middle East stop using the US dollar, it will be the end of the dollar.” Yet, the response from these countries has been tepid, with no significant shift away from the dollar in oil settlements observed so far.
