Moody’s Investors Service has predicted that the American greenback will likely retain its crown despite all the challenges from the BRICS nations to unseat it from the thrown as the world’s number one currency.
Since the Russia-Ukraine war broke out, there have been a huge concern about the U.S. dollar losing its dominance in international trade and the finance world, as a result of sanctions by the United States on Russia. However, Moody’s has moved to quell the raging debate, though admitting the emergence of a multipolar currency system in the future.
“We expect a more multipolar currency system to emerge over the next few decades, but it will be led by the greenback because its challengers will struggle to replicate its scale, safety and convertibility in full.”
Moody’s
However, that’s not to say the ratings firm doesn’t see any risks in the short term. A U.S. pivot to protectionism, weakening institutions and the risk of a default would threaten the dollar global dominance, Moody’s said.
“The greatest near-term danger to the dollar’s position stems from the risk of confidence-sapping policy mistakes by the US authorities themselves, like a US default on its debt for example. Weakening institutions and a political pivot to protectionism threaten the dollar’s global role.”
Moody’s
Debt Would Be Rapidly Shored Up
Moody’s report further noted that even if a default on the U.S. government debt would be rapidly shored up, it would permanently hurt U.S. treasury holdings as risk-free assets.
Meanwhile, the debt-ceiling standoff sent jitters to financial markets. However, U.S. officials signaled that they made some progress but no deal has been reached yet as the clock continues ticking down to the point when the Treasury runs out of cash.
The tension around the U.S. debt-limit negotiations ratcheted up after Fitch Ratings warned the nation’s AAA rating was under threat from a political standoff that’s preventing a deal. Moody’s hasn’t made any adjustments to its outlook in the wake of the wrangling in Washington to lift the nation’s borrowing capacity.
“Although we expect that politicians will eventually agree to raise or suspend the debt limit and avoid a default on government debt, greater polarization in the domestic political environment over the last decade has weakened both the predictability and effectiveness of US policymaking. Sanctions further inhibiting the free flow of the dollar in global trade and finance could encourage greater diversification.”
Moody’s
The U.S. dollar liquidity, safety and lower transaction costs will ensure its domination to continue in the international trade and finance, Moody’s concludes, citing also the lack of viable alternatives. The central banks have reduced the share of the dollar holdings to 58% from 71% in 2000, while boosting allocations to the renminbi, the Australian and the Canadian dollars, the report said.
A gauge of the dollar strength gained for a fourth day, the longest rising streak since October. The greenback is on track to gain 1.7% in value in May after two months of declines.
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