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JPMorgan: We Believe The Dollar Could Lose Its Status As World’s Reserve Currency
Almost eight year ago, we first presented a chart first created by JPMorgan’s Michael Cembalest, which showed very simply and vividly that reserve currencies don’t last forever, and that in the not too distant future, the US Dollar would also lose its status as the world’s most important currency, since it is never different this time.
As Cembalest put it back in January 2012, “I am reminded of the following remark from late MIT economist Rudiger Dornbusch: ‘Crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.'”
Perhaps it is not a coincidence then that in light of the growing number of mentions of MMT and various other terminal, destructive monetary policies that have been proposed to kick on the current financial system the can just a little bit longer, that the topic of longevity of reserve currency status is once again becoming all the rage, and none other than JPMorgan’s Private Bank ask in this month’s investment strategy note whether “the dollar’s “exorbitant privilege” is coming to an end?”
So why is JPM, after first creating the iconic chart above which has since spread virally across all financial corners of the internet, not only worried that the dollar’s reserve status may be coming to an end, but in fact goes so far as to state that “we believe the dollar could lose its status as the world’s dominant currency (which could see it depreciate over the medium term) due to structural reasons as well as cyclical impediments.”
Read on to learn why even the largest US bank has started to lose faith in the world’s most powerful currency.
Is the dollar’s “exorbitant privilege” coming to an end?
In Brief
The U.S. dollar (USD) has been the world’s dominant reserve currency for almost a century. As such, many investors today, even outside the United States, have built and become comfortable with sizable USD overweights in their portfolios. However, we believe the dollar could lose its status as the world’s dominant currency (which could see it depreciate over the medium term) due to structural reasons as well as cyclical impediments.
As such, diversifying dollar exposure by placing a higher weighting on other currencies in developed markets and in Asia, as well as precious metals makes sense today. This diversification can be achieved with a strategy that maintains the underlying assets in an investment portfolio, but changes the mix of currencies within that portfolio. This is a completely bespoke approach that can be customized to meet the unique needs of individual clients.
The rise of the U.S. dollar
It is commonly perceived that the U.S. dollar overtook the Great British Pound (GBP) as the world’s international reserve currency with the signing of the Bretton Woods Agreements after World War II. The reality is that sterling’s value was eroded for many decades prior to Bretton Woods. The dollar’s rise to international prominence was fueled by the establishment of the Federal Reserve System a little over a century ago and U.S. economic emergence after World War I. The Federal Reserve System aided in the establishment of more mature capital markets and a nationally coordinated monetary policy, two important pillars of reserve-currency countries. Being the world’s unit of account has given the United States what former French Finance Minister Valery d’Estaing called an “exorbitant privilege” by being able to purchase imports and issue debt in its own currency and run persistent deficits seemingly without consequence.
The shifting center
There is nothing to suggest that the dollar dominance should remain in perpetuity. In fact, the dominant international currency has changed many times throughout history going back thousands of years as the world’s economic center has shifted.
After the end of World War II, the U.S. accounted for biggest share of world GDP at more than 25%. This number is brought to more than 40% when we include Western European powers. Since then, the main driver of economic growth has shifted eastwards towards Asia at the expense of the U.S. and the West. China is at the epicenter of this recent economic shift driven by the country’s strong growth and commitment to domestic reforms. Over the last 70 years, China has quadrupled its share of global GDP to around 20%—roughly the same share as the U.S.—and this share is expected to continue to grow in the years ahead. China is no longer just a manufacturer of low cost goods as a growing share of corporate earnings is coming from “high value add” sectors like technology.
China regaining its status as a global superpower
Earnings in China are becoming more balanced
In addition to China, the economies of Southeast Asia, including India, have strong secular tailwinds driven by younger demographics and proliferating technological know-how. Specifically, the Asian economic zone—from the Arabian Peninsula and Turkey in the West to Japan and New Zealand in the East and from Russia in the North and Australia in the South—now represents 50% of global GDP and two-thirds of global economic growth. Of the estimated $30 trillion in middle-class consumption growth between 2015 and 2030, only $1 trillion is expected to come from today’s Western economies. As this region grows, the share of non-USD transactions will inevitably increase which will likely erode the dollar’s “reserveness”, even if the dollar isn’t replaced as the dominant international currency.
In other words, in the coming decades we think the world economy will transition from U.S. and USD dominance toward a system where Asia wields greater power. In currency space, this means the USD will likely lose value compared to a basket of other currencies, including precious commodities like gold.
Dollar’s declining role already under way?
Recent data on currency reserve holdings among global central banks suggests this shift may already be under way. As a share of overall central bank reserves, the USD’s role has been declining ever since the Great Recession (see chart). The most recent central bank reserve flow data also suggests that for the first time since the euro’s introduction in 1999, central banks simultaneously sold dollars and bought euros.
Central banks across the globe are also adding to gold reserves at their strongest pace on record. 2018 saw the strongest demand for gold from central banks since 1971 and a rolling four-quarter sum of gold purchases is the strongest on record. To us, this makes sense: gold is a stable source of value with thousands of years of trust among humans supporting it.
USD share of central bank reserves, %
The current U.S. administration has called into question agreements with nearly all of its largest partners—tariffs on China, Mexico and the European Union, renegotiating NAFTA, as well as abandoning the Trans Pacific Partnership. A more adversarial U.S. administration could also encourage countries to reduce their reliance on USD in trade. Currently 85% of all currency transactions involve the USD despite the U.S. accounting for only roughly 25% of global GDP.
Countries around the world are already developing payment mechanisms that would avoid using the dollar. These systems are small and still developing but this is likely to be a structural story that will extend beyond one particular administration. In a recent speech on the international role of the euro, Bank for International Settlements Chief Economist Claudio Borio brought up the benefits of pricing oil in the euro saying, “Trading and settling oil in the euro would move payments from dollars to euros and thereby shift ultimate settlement to the euro’s TARGET2 system. This could limit the reach of U.S. foreign policy insofar as it leverages dollar payments.” The European Central Bank also alluded to this theme in a recent report saying that “growing concerns about the impact of international trade tensions and challenges to multilateralism, including the imposition of unilateral sanctions seem to have lent support to the euro’s global standing.”
We believe we are at an important juncture. On a real basis, the dollar stands currently more than 10% above its long-term average and on a nominal basis has actually been trending lower for 50 years (see chart below).
Given the persistent—and rising—deficits in the United States (in both fiscal and trade), we believe the U.S. dollar could become vulnerable to a loss of value relative to a more diversified basket of currencies, including gold. As we scan client portfolios, we see that many of them have far more U.S. dollar exposure than we feel is prudent. At this stage of the economic cycle, we believe this exposure should be more diversified. In many cases, our recommendation would likely be to place a higher weighting on other G10 currencies, currencies in Asia and gold (see chart).
FX exposure
330 Comments on "JPMorgan: We Believe The Dollar Could Lose Its Status As World’s Reserve Currency"
I AM THE MOB on Mon, 29th Jul 2019 3:41 pm
Another terrorist attack via mass shooting by a Nazi yesterday in California. Just like 98 percent of the terrorist attacks committed last year.
Cloggie on Mon, 29th Jul 2019 3:47 pm
The markets think that no-deal Brexit is not a good… not for Britain that is:
https://www.dailymail.co.uk/money/markets/article-7297433/Pound-hits-new-two-year-lows-no-deal-Brexit-rhetoric-hardens.html
“Fresh fears of a no-deal Brexit send the pound down to levels not seen since March 2017”
“clog, stick your bexit shit up your ass I am through with you”
Floppy is angry, I love that. Means, he is letting us look in his (weak) cards.
Cloggie on Mon, 29th Jul 2019 3:51 pm
“Another terrorist attack via mass shooting by a Nazi yesterday in California. Just like 98 percent of the terrorist attacks committed last year.”
https://documents1940.wordpress.com/2018/06/11/cw2-brewing/
Are you ready, floppy? It’s coming.
I AM THE MOB on Mon, 29th Jul 2019 3:53 pm
The far right are trying to bring down Western civil society. They are like the barbarians who destroyed Rome.
More Davy ID Fraud on Mon, 29th Jul 2019 3:57 pm
JuanP on Mon, 29th Jul 2019 2:53 pm
JuanP on Mon, 29th Jul 2019 2:54 pm
Cloggie on Mon, 29th Jul 2019 4:05 pm
BBC News now: Vauxhall comes with no-deal Brexit warning.
https://www.independent.co.uk/news/business/brexit-vauxhall-uk-factory-ellesmere-port-cheshire-plant-no-deal-a9024836.html
“Vauxhall set to close UK factory with loss of 1,000 jobs if no-deal Brexit goes ahead, chief executive suggests”
Expect a long list of companies to follow (to Europe).
The wine will be tasting good tonight in Brussels.
Cloggie on Mon, 29th Jul 2019 4:07 pm
“The far right are trying to bring down Western civil society. They are like the barbarians who destroyed Rome.”
Western “civilization”, as defined by the US, is something to be pissed upon.
JuanP is a coward and a on Mon, 29th Jul 2019 4:14 pm
liar
“More Davy ID Fraud on Mon, 29th Jul 2019 3:57 pm”
Cloggie on Mon, 29th Jul 2019 4:18 pm
BBC News: IRA gearing up again to use violence in order to push through irish unification.
Signs in the streets with death threats and nobody dares to take them down.
Cloggie on Mon, 29th Jul 2019 4:45 pm
“No-deal Brexit was once a sick Tory joke. Now it’s serious”
https://www.theguardian.com/commentisfree/2019/jul/29/no-deal-brexit-tory-joke-boris-johnson-economic-britain
The lunatics have taken over the asylum and there is no way back. This fould turn extremely nasty:
“There’s an economic storm coming, in which we will “probably still lose the kitchen but might save the bedroom,” says CBI’s deputy boss, Josh Hardie. Vauxhall seems certain to move its Ellesmere Port plant to the EU.”
https://www.theguardian.com/commentisfree/2019/jul/29/brexit-boris-johnson-repel-voters-fear-tories
“Boris Johnson’s crew will repel voters – there’s no need to fear him”
“He goes nuclear. Standing in Faslane Trident submarine base, finger on the button, our prime minister’s Brexit strategy is MAD, mutually assured destruction. His preposterously nicknamed “Brexit war cabinet” met for the first time on Monday. Every minister has been “turbocharged” to prepare for the great no-deal blitz in three months’ time. The idea is to terrify the enemy: the effect will be to petrify ourselves, shocking and awing us into understanding the full implications of no deal.”
The British are busy blowing up the post-war peace order. Fortunately they are 65m where we are 440m. Plus we. have an anti-Anglo hinterland of 1.5 billion.
Unlike 1939, the continental European cards are infinitely better.
Davy on Mon, 29th Jul 2019 4:46 pm
Come on out and bicker with me like a man juanpee.
Another Davy Sock Puppet on Mon, 29th Jul 2019 4:47 pm
JuanP is a coward and a on Mon, 29th Jul 2019 4:14 pm
More JuanPervert on Mon, 29th Jul 2019 4:49 pm
Davy on Mon, 29th Jul 2019 4:46 pm
More Davy Sock Puppetry on Mon, 29th Jul 2019 4:50 pm
More JuanPervert on Mon, 29th Jul 2019 4:49 pm
Stupid obsessions on Mon, 29th Jul 2019 4:53 pm
Of JuanPervert
More Davy Sock Puppetry on Mon, 29th Jul 2019 4:50 pm
Davy on Mon, 29th Jul 2019 4:55 pm
I am spending less time on this lame unmoderated forum to concentrate on my own blog. I do want to thank all those who have attacked me with giving me material for growth. I have saved the best of my comments for my new blog. I have years worth of material. I have enjoyed moderating the worst of you and neutering your selfish useless agendas. I will still be here it is just I will be spending more time putting out a blog. I don’t expect much of a following with my blog. This is more a personal effort to assemble what I have learned over the last 10 years of formulating my REAL Green Deep Adaptation. Many of my ideas and lifestyles are not mine. I barrow what ever works. I do not claim anything either. It is an open source effort. Anyone can take what I am offering and use it however you want. Take my title if you like. For the stalkers here I hope you find my blog and visit the comment forum. It will be only lightly moderated to prevent juanpee identity theft and excessive cloggo spamming. LOL. There will be a prize for juanpee and annoymouse if you can stalk my blog. Double LOL. Anyway fuck my enemies and many thanks to those who contributed to my metamorphous.
I guess I could have joined the moderated section at PO dot com, but I knew I’d get my ass permanently banned. I’ll try not to let the door smack me up the backside on the way out.
Goodbye to ALL of you dumbasses.
More Davy Sock puppetry on Mon, 29th Jul 2019 4:56 pm
Stupid obsessions on Mon, 29th Jul 2019 4:53 pm
JuanPee is fraud on Mon, 29th Jul 2019 5:00 pm
Davy on Mon, 29th Jul 2019 4:55 pm
I am spending less time on this lame unmoderated forum to concentrate on my ow
The real Davy on Mon, 29th Jul 2019 5:03 pm
JuanP, you try so hard to get rid of me but I am still here, lunatic. I have crushed you and all your pals. Even makato is rarely here anymore. Victory for me and defeat foe the playboy Miami Beach fuck face
More Davy Fraudulent Sock Puppetry on Mon, 29th Jul 2019 5:04 pm
JuanPee is fraud on Mon, 29th Jul 2019 5:00 pm
The real Davy on Mon, 29th Jul 2019 5:05 pm
Oops, sorry for losing my widdle temper again everyone.
Davy on Mon, 29th Jul 2019 5:06 pm
I am spending less time on this lame unmoderated forum to concentrate on my own lame blog. I do want to thank all those who have attacked me with giving me material for growth. I have saved the best of my lame comments for my new lame blog. I have years worth of my own lame material.
The real Davy on Mon, 29th Jul 2019 5:10 pm
Widdle Juan is so upset because his gang has been crushed. LMFAO. JuanPee, when is the last time you won a debate?! You are dumber than a box of rocks, Miami Beach fuck wack. Go surf on your widdle Miami Beach waves. Go sail your hobbie cat. Lol. What a waste
I AM THE MOB on Mon, 29th Jul 2019 5:12 pm
Clogged toliet.
You really should get a life and enjoy what is likely going to be your final decade.
Life is too short to spend all day every day angry and bitter. Stop blaming others and pull up your damn bootstraps!
The real Davy on Mon, 29th Jul 2019 5:13 pm
JuanPee, where are your anti-American friends these days? You are the last and I am taking you down, fuck face south American. Go home to your failed continent
Yet Another Davy Sock Puppet on Mon, 29th Jul 2019 5:13 pm
The real Davy on Mon, 29th Jul 2019 5:10 pm
Davy on Mon, 29th Jul 2019 5:15 pm
Oops, sorry for losing my widdle temper again y’all. I get triggered real easy.
The real Davy on Mon, 29th Jul 2019 5:15 pm
Juan, please show me a debate you have won in the last year. LMFAO. You can’t because you are a mindless troll
Davy on Mon, 29th Jul 2019 5:17 pm
I take this lame forum real seriously, cause lame forums are real important to me.
The real Davy on Mon, 29th Jul 2019 5:20 pm
JuanPee, are you beaten but can’t deal with the pain of being a loser. Go back to your loser South America. You will fit right in. You are a stellar example of what South America has to offer. Please flush the turd.
The REAL Lame Davy on Mon, 29th Jul 2019 5:21 pm
I am spending less time on this lame unmoderated forum to concentrate on my own REAL Lame blog. I do want to thank all those who have attacked me with giving me material for growth. I have saved the best of my REAL Lame comments for my new REAL Lame blog. I have years worth of my own REAL Lame material.
Davy on Mon, 29th Jul 2019 5:23 pm
I approve this message.
“I am spending less time on this lame unmoderated forum to concentrate on my own REAL Lame blog. I do want to thank all those who have attacked me with giving me material for growth. I have saved the best of my REAL Lame comments for my new REAL Lame blog. I have years worth of my own REAL Lame material.”
The real Davy on Mon, 29th Jul 2019 5:25 pm
You can’t answer my comments can you fuck face. You are a failure. Your gang has been crushed. You south american home is a complete failure. Everything about you has failure written all over it. Flush the turd
Davy on Mon, 29th Jul 2019 5:29 pm
Oops, sorry for being such a self absorbed moron everyone. I just realized this is a discussion forum, not a debating forum. Theres a big difference.
“The Difference Between Debating and Discussing”
“The difference between a debate and a discussion involves openness. If one or both participants in a conversation are open to new ideas, it opens the way for a discussion. If both believe there is no way they would ever change their opinion in anyway, it will always turn into a debate.”
“Let’s make this the year of civil discussions – conversations that are more about learning than winning, where we look to listen first and are authentic in what we know and don’t know. These are the interactions that will change the world, one discussion at a time.”
https://www.thindifference.com/2016/03/difference-debating-discussing/
The real Davy on Mon, 29th Jul 2019 5:31 pm
Oops, sorry for losing my widdle temper again y’all.
The real Davy on Mon, 29th Jul 2019 5:52 pm
JuanPee, you are a failure. Your gang is
Crushed. Your continent is a huge failure. You can’t debate. All you are good at is trolling. Flush the illegal Turd back south to his failed continent.
Davy on Mon, 29th Jul 2019 6:03 pm
This is a discussion forum juanpee, not a debating forum, and South America is not YOUR continent.
dumbass
Davy on Mon, 29th Jul 2019 6:10 pm
This is my forum juanpee, not a debating forum, and North America is MY continent.
dumbass
The real Davy on Mon, 29th Jul 2019 6:21 pm
North America is not your continent juanpee
stupid
Davy on Mon, 29th Jul 2019 6:27 pm
It’s as much MY continent as it is YOUR continent juanpee.
dumbass
Davy on Mon, 29th Jul 2019 6:50 pm
It’s a much MY continent as it is MINE juanpee.
dumbass
The Real Davy on Mon, 29th Jul 2019 7:05 pm
Get out of here JuanPee you disgusting South American fuck face. Go chase boys down there in your failed South America We don’t need your pervert shit up here.
Davy on Mon, 29th Jul 2019 7:10 pm
You never invite me to any of your beach parties in Miami Beach juanpee. I can’t imagine why, especially after everything I have done for you. Like give you free immigration advice and tips. I dont so that for just anyone. Your ingratitude, and not inviting me to the beach to hang out with you, is the REAL GREEN reason why I hate you so.
dumbass
The Real Davy on Mon, 29th Jul 2019 7:12 pm
Oops, sorry for my widdle temper tantrum again everyone.
The real Davy on Mon, 29th Jul 2019 7:18 pm
juanpee, you are a selfish egotistical mentally ill fuck. You ruined the day for everyone. Are you satisfied ?
You don’t care. Your goal is to take this forum down. Pathetic piece of shit
Davy on Mon, 29th Jul 2019 7:21 pm
Oops, sorry for the widdle tantrum again everyone.
The Real Davy on Mon, 29th Jul 2019 7:29 pm
Hay y’all. Did I mention I am spending less time on this lame unmoderated forum to concentrate on my own REAL Lame blog. I do want to thank all those who have attacked me with giving me material for growth. I have saved the best of my REAL Lame comments for my new REAL Lame blog. I have years worth of my own REAL Lame material.
I think I might of.
Cloggie on Tue, 30th Jul 2019 2:41 pm
Floppy says: Russian Opposition Leader Navalny May Have Been Poisoned, Says Doctor
https://www.themoscowtimes.com/2019/07/28/russian-opposition-leader-navalny-may-have-been-poisoned-says-doctor-a66601
Another murder in cold blood..Putin is the new Hitler!
Hit em hard!
Navalny isn’t dead, you fool. He may have eaten rotten caviar.
Cloggie on Tue, 30th Jul 2019 2:57 pm
I see that I AM THE MOB is probably from Middleville, Michigan or there about (Grand Rapics is another possibility). He left a comment on my blog (the same garbage he has posted 100 times on this board), incl ip-address and email-address.
https://cdn.photos.sparkplatform.com/ric/20181102113527325114000000-o.jpg
No wonder he is yearning for world revolution. In boring Middleville they are still talking about the cow that ran away 15 years ago.
Floppy lives not too far from Sissifuss. Perhaps a tea-visit?
LOL
Davy on Tue, 30th Jul 2019 3:01 pm
Good find Cloggo!