JPMorgan Warns of De-dollarization Risk: Loss of Key Crisis-Fighting Tool for the US

JPMorgan Warns of De-dollarization Risk: Loss of Key Crisis-Fighting Tool for the US

JPMorgan Warns of De-dollarization Risk: US May Lose Vital Crisis-Fighting Tool

JPMorgan's strategists, led by Marko Kolanovic, caution that the primary de-dollarization risk isn't a rival currency but centers on inflation and mounting debt for Western economies. They emphasize that emerging powers won't suddenly abandon the dollar but highlight potential vulnerabilities tied to inflation, debt, and energy prices.

The history of USD supremacy relied on factors like imported deflation, trade dynamics, and energy independence. However, as global economies decouple and energy costs rise, the effectiveness of crisis measures that central banks used in the past may be compromised, leading to inflation and debt issues in the West.

Fitch's recent downgrade of the US credit rating underscores this risk. Environmental imbalances, like outsourcing carbon-intensive industries, have made the West vulnerable to inflation shocks.

JPMorgan also notes early signs of de-dollarization, particularly in the oil market where non-dollar transactions, such as in yuan, are growing. While marginal de-dollarization is expected, the dollar's entrenched position in the global financial system will likely slow any major shifts.

Instead, partial de-dollarization, with the renminbi taking on some dollar functions among non-aligned countries and China's trading partners, seems more plausible amid growing strategic competition.

JPMorgan's analysts stress that the primary risk of de-dollarization isn't the emergence of a competing currency but rather the potential loss of a critical economic crisis-management tool for the United States.

Their analysis suggests that emerging powers are unlikely to suddenly abandon the US dollar or replace it with another currency. Instead, the primary de-dollarization risk facing Western economies relates to inflation and their burgeoning debt burdens.

Historically, the US dollar's dominance relied on factors like importing deflation through trade, outsourcing less profitable sectors of the economy, recycling trade surpluses into USD assets, and achieving domestic energy independence through shale growth. These factors allowed Western central banks to effectively navigate economic crises through monetary and fiscal measures.

However, as global economies become more independent from each other and potentially conflict, coupled with rising energy prices, these crisis management measures may be at risk. This could lead to inflation and debt crises in Western economies.

Fitch's recent downgrade of the US credit rating from AAA to AA serves as a reminder of the potential for such a scenario, even though it's considered low probability.

JPMorgan also highlights the concept of "environmental arbitrage," where carbon-intensive industries were outsourced to the East, leaving the West economically fragile and susceptible to inflation shocks. The inability of the West to produce sufficient supplies of essential resources, like natural gas, cheap food, or munitions for Ukraine, further exemplifies this vulnerability.

In a separate note, JPMorgan analysts point out signs of de-dollarization already taking root, particularly in the oil market where non-dollar transactions, such as those in yuan, are increasing. However, they expect any de-dollarization to be gradual due to the widespread use of the dollar in the global financial system.

Instead of a rapid shift away from the dollar, JPMorgan anticipates a more plausible scenario of partial de-dollarization, where the renminbi assumes some of the dollar's functions, particularly among non-aligned countries and China's trading partners, amid intensifying strategic competition.

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