Is the U.S. Dollar’s Dominance Under Threat? | Morgan Stanley (2024)

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Is the U.S. Dollar’s Dominance Under Threat? | Morgan Stanley? ›

The dollar's status as the top currency of central banks and for international trade probably isn't fading soon, according to Morgan Stanley. The investment bank pointed to fears that the US dollar could eventually be dethroned as the world's top-held and most widely used currency.

Dollar dominance—the outsized role of the US dollar in the world economy—has been brought into focus recently as the robustness of the US economy, tighter monetary policy and heightened geopolitical risk have contributed to a higher greenback valuation.

Escalating trade wars and geopolitical tensions, particularly between the U.S. and China, could also threaten the dollar. If conflicts intensify and lead to a decoupling of the world's two largest economies, efforts to reduce reliance on the dollar might be accelerated.

We expect 2024 to be a year of diverging trends for the dollar. It will likely move lower on a broad trade-weighted basis early in the year but stabilize as the year progresses. Although we expect a general downward drift for the dollar, performance of individual currencies will likely vary widely.

For the dollar, the gains mark quite a comeback. The greenback had soared in 2022 to its highest in around two decades, but slipped a little last year. Interest rates are playing a part too. The Federal Reserve continues to maintain relatively high interest rates compared to U.S trading partners, like Japan and Europe.

The U.S. Federal Reserve controls the supply of money in the U.S. When it expands the money supply using monetary policy tools, it is often described as printing money.

The highest-valued currency in the world is the Kuwaiti Dinar (KWD). Since it was first introduced in 1960, the Kuwaiti dinar has consistently ranked as the world's most valuable currency.

Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.

A falling dollar diminishes its purchasing power internationally, and that eventually translates to the consumer level. For example, a weak dollar increases the cost to import oil, causing oil prices to rise. This means a dollar buys less gas and that pinches many consumers.

What weakens the dollar? ›

Easy monetary policy by the Fed can weaken the dollar when investment capital flees the U.S. as investors search elsewhere for higher yield. Declining economic growth and corporate profits can cause investors to take their money elsewhere.

The Kuwaiti dinar is so valuable because the demand for it is so high. This is due to Kuwait having a strong, stable economy backed by vast oil reserves. Other currencies that are stronger than the U.S. dollar include the Bahraini dollar, the Oman rial, the Jordanian dinar, and the Gibraltar pound.

Currency valuations fluctuate constantly, driven by the flow of funds between markets. The two biggest drivers are central bank policies (interest rates set by the U.S. Federal Reserve and its counterparts in Europe, England, Japan and elsewhere); and economic growth relative to inflation.

How did the U.S. dollar become the world's leading reserve currency? The dollar's status as the global reserve currency was cemented in the aftermath of World War II by the 1944 Bretton Woods Conference, in which forty-four countries agreed to the creation of the IMF and the World Bank.

Kuwaiti Dinar (KWD) is the strongest currency against USD and the most valued currency in the world due to the country's strong economy.

Monetary hegemony is an economic and political concept in which a single state has decisive influence over the functions of the international monetary system. A monetary hegemon would need: accessibility to international credits, foreign exchange markets.

This is tied to the fact that the US has the largest economy in the world, along with the dollar's use globally. Not only is it commonly exchanged outside the US, but several nations have tied their currencies to the dollar or adopted it as their official currency.