What are the causes and implications of de-dollarization?
There are two main factors that could erode the dollar’s status. The first includes adverse events that undermine the perceived safety and stability of the greenback — and the U.S.’s overall standing as the world’s leading economic, political and military power. For instance, increased polarization in the U.S. could jeopardize its governance, which underpins its role as a global safe haven. Ongoing U.S. tariff policy could also cause investors to lose confidence in American assets.
The second factor involves positive developments outside the U.S. that boost the credibility of alternative currencies — economic and political reforms in China, for example. “A candidate reserve currency must be perceived as safe and stable and must provide a source of liquidity that is sufficient to meet growing global demand,” said Alexander Wise, who covers Long-Term Strategy at J.P. Morgan.
Fundamentally, de-dollarization could shift the balance of power among countries, and this could, in turn, reshape the global economy and markets. The impact would be most acutely felt in the U.S., where de-dollarization would likely lead to a broad depreciation and underperformance of U.S. financial assets versus the rest of the world.
“For U.S. equities, outright and relative returns would be negatively impacted by divestment or reallocation away from U.S. markets and a severe loss in confidence. There would also likely be upward pressure on real yields due to the partial divestment of U.S. fixed income by investors, or the diversification or reduction of international reserve allocations,” Wise said.