Morgan Stanley says dollar likely to remain top global currency

London — The dollar’s status as the dominant reserve currency is likely to endure partly because even the most talked about alternative — China’s yuan — falls short as a credible challenger, Morgan Stanley says.

Rivalry with China, Russia’s war in Ukraine, wrangling in Washington over the US debt ceiling and rising debt levels have put the dollar’s status as the dominant currency under scrutiny in recent years.

In a new report exploring the greenback’s reserve status, Morgan Stanley said it did not expect the currency’s dominance to change soon, noting that dollar influence in the global economy remained strong across a range of economic and financial metrics.

Concerns about the US fiscal outlook and the persistent use of economic sanctions by Washington could motivate some countries to seek alternatives to the dollar, but it was a difficult task, Morgan Stanley said.

“The most discussed competitor is China, and we do expect a modestly more global role for CNY,” the Morgan Stanley note stated, referring to the yuan.

“But we think that China’s ‘3D challenge’ of debt, deflation and demographics will limit CNY’s international appeal,” the note added, estimating that currency reserves in yuan should rise to only 5% in 2030 from 2.3% now.

Periods of dollar weakness were to be expected, while the approaching US presidential election could test its status, the financial services giant said.

Global currency reserves exceed $12-trillion, global trade was about $35-trillion and cross-border bank lending exceeded $38-trillion, it said.

“So, even small changes in percentage terms can lead to large nominal changes. “We expect only a moderate and gradual decline in USD’s international use, given the rise in multipolarity and continued low diversification costs for reserve managers,” the note stated.

In terms of the price impact, “a true loss of USD dominance would lead to higher rates and a weaker currency”.

Morgan Stanley also saw more short-term strength for the dollar. Persistently high US inflation and a resilient economy, which have prompted markets to scale back expectations for rate cuts, together with heightened tensions in the Middle East have bolstered the dollar of late. This week, the dollar hit 34-year highs against the yen and five-month peaks against the euro.

Reuters