JPMorgan strategists led by Marko Kolanovic highlighted the potential risks of de-dollarization in a note on Tuesday. The primary threat is not the replacement of the dollar by another currency, but rather the implications for Western economies in terms of inflation and debt burdens.
Historically, factors such as trade with the global South and East, outsourcing less profitable segments of the economy, recycling of trade surpluses into USD assets, and domestic energy independence (notably U.S. shale growth) have been key to the USD's dominance. These factors have allowed Western central banks to navigate economic crises through a blend of monetary and fiscal measures.
However, as global economies begin to decouple or enter outright conflict amid rising energy prices, these crisis management measures could be jeopardized. This could potentially trigger inflation and debt spirals for Western economies, JPMorgan strategists warned on Tuesday.
This risk is further amplified by environmental 'arbitrage', where carbon-intensive industries such as manufacturing and commodity production are outsourced to the East. This leaves Western economies industrially fragile and more susceptible to inflation shocks.
Recent examples include the West's inability over the past year to produce sufficient supplies of natural gas , cheap food, or munitions for Ukraine. Fitch's recent downgrade of the U.S. credit rating to AA from AAA also serves as a reminder of such risks, even if they remain low.
In a separate note last Thursday, JPMorgan analysts observed signs of de-dollarization already taking root. The oil market, for instance, has seen an increase in transactions conducted in non-dollar currencies, such as the yuan.
Despite these observations, JPMorgan anticipates only "marginal de-dollarization" due to the widespread use of the dollar in the global financial ecosystem. The analysts suggested that a more plausible scenario would be partial de-dollarization - where the renminbi assumes some of the dollar's current functions among non-aligned countries and China's trading partners - especially against a backdrop of strategic competition.
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