Bank of America, one of America's largest banking institutions, has warned that the key threats to the dominance of the US dollar stem from domestic fiscal issues rather than competition from other currencies. The bank's analysts pointed out that the risk of the US defaulting on its debts poses a threat to the currency's attractiveness as a store of value. Should a surprise default occur during a debt ceiling showdown, the US dollar is likely to lose some of its attractiveness as a result. The analysts have therefore identified US fiscal brinkmanship, especially regarding the possibility of a government shutdown or a default, as the key threats to the dollar's dominant role.
Despite the recent headlines on de-dollarisation, Bank of America has claimed that the US dollar is not in danger of losing its dominance in the near future. Nonetheless, the bank has cautioned that the long-term risk to the US dollar stems from complacency regarding government debts. The US Treasury's debt is among the highest in the G10, viewed in terms of the percentage of GDP, and the International Monetary Fund (IMF) predicts that the US debt-to-GDP ratio will increase further, from 122% in 2022 to 136% by 2028.
Meanwhile, U.S. Treasury Secretary Janet Yellen announced that the Treasury may not be able to pay all of the government's bills by June 1 if Congress does not raise or suspend the debt limit before then. Yellen warned that should Congress fail to increase the debt limit, it would cause "severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests."
Bank of America has also pointed out that although the US dollar has lost some market share among central bank reserves, it remains the dominant currency in trade, international invoicing, and SWIFT payments. Therefore, despite the rising de-dollarisation trend and the risk of US default on its debts, Bank of America believes there is currently no viable alternative to the US dollar. The analysts, however, cautioned that if the Chinese regulators open up their capital account, the use of the Chinese yuan could expand internationally but at the same time could make China vulnerable to outflow volatility and monetary policy interference.
Moreover, a BRICS currency is unlikely to replace the US dollar as the world's reserve currency, according to Bank of America. Such a currency would require cooperation among member countries with limited trade, except for China, and whose relationships are often tense according to the bank's analysts. BRICS countries include Brazil, Russia, India, China, and South Africa, and the economic bloc has been gaining global influence. Nonetheless, multiple economists predict that a BRICS currency would erode the US dollar's dominance. Some Swedish university professors recently claimed that the Chinese yuan would accelerate as a trading currency if Saudi Arabia joined the BRICS group.
In conclusion, while Bank of America has warned that the US dollar's dominant position is at risk from domestic fiscal issues, the bank remains steadfast in its belief that there is no viable alternative currency to the US dollar. However, the long-term risk to the US currency may likely stem from complacency regarding government debts, as further increases in the debt-to-GDP ratio could further weaken the attractiveness of the dollar as a store of value.
