Bank of America recently published a note stating that concerns about de-dollarization are overstated and that the greenback's reign as the world's dominant currency is secure. However, the bank warned that increasing US debt and political brinkmanship pose significant threats to the US dollar.
The note explained that the dollar's dominant role is mainly due to its status as the world's reserve currency, and any surprise default due to domestic fiscal issues such as the US government's current debt ceiling showdown would compromise the dollar's attractiveness as a store of value.
Although the Bank of America analysts did not believe that the dollar would lose its exorbitant privilege, they emphasized that complacency about the US's high level of debt could pose a long-term risk to the greenback. According to the IMF, the US government's debt-to-GDP ratio is expected to rise to 136% by 2028 from 122% in 2022.
The note also pointed out that the US's fiscal brinkmanship could lead to a government shutdown or even worse, a default, as Republicans in Congress demand spending cuts in return for raising the debt ceiling, while the White House has refused to allow any conditions. The government could default as soon as June 1, and this could compromise the dollar's dominant role.
Bank of America believes that while there are no real alternative currencies to replace the dollar, the yuan has the potential to grow internationally. However, Chinese regulators controlling the currency level must open China's capital account to enable outflow volatility and monetary policy interference. This makes it unlikely that the yuan will replace the dollar.
Moreover, the analysts think that a BRICS currency is also unlikely because its development would require cooperation between members who do not trade much with each other beyond China, and whose relationships can often be tense.
The only digital asset that could disrupt currency trends is stablecoins, although their unclear legislative frameworks impair them. However, if developed further, a dollar-backed cryptocurrency could strengthen the dollar's position, according to BofA.
