The Dominance of the Dollar Faces Challenges, but is Unlikely to be Overturned in the Short Term
UBS pointed out in its latest report that although the process of de-dollarization is accelerating globally, the dollar still dominates all aspects of international trade and financial markets. The report suggests that changes in the dominance of global currencies usually take a long time to materialize. Although the economic status of major powers may change, their currency's reserve status can usually be maintained for an extended period.
The Dollar's Share in Foreign Exchange Reserves and Payment Systems Remains Strong
According to data from the International Monetary Fund (IMF), the dollar's share in international foreign exchange reserves remains close to 60%. Although this is a decrease from about 78% at the end of the last century, it has remained relatively stable over the past four years. Furthermore, the dollar’s share in the global payment system remains ahead by a wide margin, at 47%, far surpassing the euro and pound. The yuan ranks fourth and continues to grow steadily.
The Dollar's Liquidity is Unparalleled
The dollar's advantage in global financial market liquidity remains strong. According to the Bank for International Settlements (BIS), the dollar accounts for 88% of total global daily trade. In addition, the dollar also provides a deep derivatives market, allowing participants to effectively hedge risk exposure, further cementing its position in the global financial system.
U.S. Institutional Advantages Support the Dollar
UBS notes that despite facing challenges such as debt issues and partisan divides affecting confidence in the U.S. economy's future, the U.S. still has strong institutional advantages in market openness, regulatory quality, and the rule of law, which continue to attract foreign investment.
The Gold Market Presents New Opportunities
UBS also pointed out that despite the dollar’s strength relying on the performance of the U.S. economy, the market should also pay attention to other investment opportunities. Particularly, in the context of emerging market central banks increasing their gold reserves, UBS expects gold prices to continue rising, potentially reaching $2,900 per ounce by mid-2025. Meanwhile, the dollar’s high valuation also reminds investors to hedge risks at the current juncture to reduce exposure to dollar risk.
A Weak Euro May Support Dollar Strength
The long-standing weakness of the euro may become a supporting factor for the dollar’s strength. The euro faces economic and political issues, particularly the economic problems in France and Germany and the escalating Russia-Ukraine conflict, all of which exacerbate concerns about the euro's outlook. Additionally, market expectations of further rate cuts by the European Central Bank have led to continued euro weakness, thus indirectly supporting the dollar's strength.
The Dollar's Dominance May Not be Easily Changed
UBS believes that even though the global de-dollarization process is accelerating, the dollar's dominance is unlikely to be threatened in the foreseeable future. The dollar’s global liquidity, its dominant position in the payment system, and U.S. institutional advantages will continue to consolidate its core position in international financial markets. However, the risk of the dollar's overvaluation remains, and investors should prudently adjust asset allocations to reduce exposure to dollar risks while paying attention to investment opportunities in safe-haven assets like gold.
