2023-05-10 06:14:00
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Investing.com – Bank of America (NYSE:) warned that the main threats to the dominance of the US dollar are largely domestic and domestic. Where the bank reduced the ability of other currencies, such as the yuan or the currency that the BRICS bloc intends to create, to compete with the dollar.
Meanwhile, US Treasury Secretary Janet Yellen warned that Congress’ failure to raise the federal debt ceiling of $31.4 trillion would deal a massive blow to the US economy and weaken the dollar’s position as the global reserve currency.
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The dominance of the dollar is at stake
Analysts of the bank stressed that “a sudden default by America may harm the attractiveness of the dollar as a reserve currency and store of value.”
Bank of America reportedly said in a recent note that despite recent news of de-dollarization, the US dollar is not in danger of losing its dominance anytime soon. However, the bank warned that the US dollar is exposed to risks due to domestic financial issues, such as the possibility of the US defaulting on its debt obligations.
Therefore, the main threats to the dominant role of the US dollar appear to be largely domestic, in contrast to competition from other currencies.
“It is really necessary for Congress to raise the debt ceiling so that we are not in a situation of defaulting on our payments,” the US Treasury Secretary said, warning that this might lead to “financial chaos”.
In response to a question regarding who is given priority in the event that the government runs out of money to pay all its obligations, Yellen replied, “There are no good options. Every option is a bad option.”
Analysts also warned that a long-term risk to the US currency is the debt overhang, noting that apart from Japan, US government debt as a percentage of GDP is the highest in the G10. Moreover, the International Monetary Fund (IMF) expects the US debt-to-GDP ratio to increase from 122% in 2022 to 136% by 2028.
Alternative currencies to the dollar
Despite the risk of US default on its debt obligations and the increasing trend of de-dollarization, Bank of America believes that there are no alternative currencies that can be substituted for the US dollar, as it is the dominant currency in trade, international payments and SWIFT payments. However, analysts warned that the US dollar lost some market share among central bank reserves.
BofA also noted that its use might expand internationally, but stressed that Chinese regulators would need to open accounts for its own capital, an issue that might leave China vulnerable to fluctuations in money outflows and intervention in monetary policy.
In addition, Bank of America analysts believe that the BRICS currency is unlikely to replace the US dollar as the global reserve currency, because it would require cooperation among member states that have limited trade with each other, with the exception of China, whose relations can often be nervous. The BRICS countries include Brazil, Russia, India, China and South Africa. The economic bloc has gained global influence in the recent period, with nineteen countries applying to join or expressing their desire to join.
However, many economists expect the BRICS currency to erode the dominance of the US dollar. A Swedish university professor recently said that Saudi Arabia’s accession to the BRICS group will accelerate the use of Chinese as a trade currency at the international level.
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