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Bank of America has warned that the main threats to US dollar dominance are largely domestic, as opposed to competition from other currencies, including a BRICS currency. The U.S. fiscal strategy, with risks of government shutdown or, even worse, default, continues to surface in debt ceiling talks, bank analysts pointed out.
Bank of America on threats to US dollar dominance
Bank of America reportedly said in a note Thursday that despite recent headlines about dedollarization, the U.S. dollar is not likely to lose its dominance anytime soon. However, the bank warned that the USD is threatened by domestic fiscal issues, such as the possibility that the United States will default on its debt obligations.
“Because a lot of the dominant role of the USD comes from standing ahead of the TSY [U.S. Treasury] market, surprise defaults due to a debt ceiling showdown would undermine the attractiveness of the dollar as a store of value,” Bank of Americas analysts said, adding:
Therefore, the main threats to the dominant role of the USD appear largely domestic, as opposed to competition from other currencies.
Analysts have warned that the long-term risk for the US currency is debt complacency, noting that with the exception of Japan, US government debt as a percentage of GDP is the highest in the G10. Additionally, the International Monetary Fund (IMF) predicts that the US debt-to-GDP ratio will fall from 122% in 2022 to 136% by 2028.
Bank of America describes:
US fiscal strategy, with risks of government shutdown or, even worse, default, comes up time and time again when discussing the debt ceiling.
US Treasury Secretary Janet Yellen recently revealed that the Treasury may not be able to pay all government bills by June 1 if Congress does not raise or suspend the debt ceiling. before this date. She also warned that if Congress fails to raise the debt ceiling, it would cause serious hardship for American families, hurt our position as a global leader, and raise questions about our ability to defend our national security interests.
Alternative currencies to USD
Despite the danger that the United States will not meet its debt obligations and a growing trend of dedollarization, Bank of America believes that there is no viable alternative currency to the American dollar and that the USD remains the currency dominant in commerce, international invoicing and SWIFT payments. . Nevertheless, analysts warned that the US dollar had lost market share among central bank reserves.
Analysts wrote:
The USD is not about to lose its exorbitant privilege, no single alternative has emerged.
Bank of America further noted that the use of the Chinese yuan could grow internationally, but stressed that Chinese regulators should open its capital account, which could make China vulnerable to outflow volatility and monetary policy interference.
In addition, Bank of America analysts believe that a BRICS currency is unlikely to replace the US dollar as the world’s reserve currency, as it would require cooperation between member countries that have limited trade between them. them, with the exception of China, and whose relations can often be strained. BRICS countries include Brazil, Russia, India, China and South Africa. The economic bloc is gaining influence globally. Nineteen countries have applied to join or have expressed an interest in joining.
However, several economists expect a common BRICS currency to erode the dominance of the US dollar. A Swedish university professor recently said Saudi Arabia’s BRICS membership would accelerate the use of the Chinese yuan as a currency.
Do you agree with Bank of America on the dominance of the US dollar? Let us know in the comments section below.
Kevin Helms
Image credits: Shutterstock, Pixabay, Wiki Commons
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