BofA: US Dollar's Dominance, Privilege Are Here To Stay - BRICS, Yuan & Crypto Are Not Alternatives

The global dominance of the US dollar is not in any way under threat, as no other currency alternatives are available.

That's according to Bank of America Securities, which has pushed back strongly against recent headlines claiming that the US dollar's global role is about to end soon because emerging countries, and in particular BRICS (Brazil, Russia, India, China, and South Africa), are negotiating an alternative currency to replace the USD in trading with each other. 

The "USD not about to lose its exorbitant privilege" as "no single alternative has appeared," BofA said in the note authored by Athanasios Vamvakidis, a foreign exchange strategist, and other analysts.

The dollar remains by far the most important anchor currency for FX arrangements throughout the world, with the USD's proportion in FX market turnover falling just somewhat from 90% in 1988 to 88% in 2022. 

See Also: Hold Onto Your Wallets — A New World Currency Could Be In The Making, Courtesy Of BRICS Nations

The shift away from the USD in global central bank reserves has been very slow over decades. The share of USD reserve holdings by central banks around the world has gradually declined from 70% in 1999 to 58% today, but it has not been "a straight-line process": the increase in USD reserve holdings from 2012 to 2016 reflects the scars of the EZ sovereign debt crisis, as well as the impact of negative rates, ECB QE, and Brexit. 

The value of the US dollar remains historically strong. The US Dollar Index, which is tracked by the Invesco DB USD Index Bullish Fund ETF UUP, reached its highest level since the late 1990s in nominal terms, 

The euro has little prospect of becoming a global alternative to the U.S. dollar. "The Eurozone bond market is no competitor to the Treasury market. At the same time, the German bond market has nowhere near the depth or liquidity of the Treasury market."

So long as China's financial system remains restricted to foreign investors, the Chinese Yuan (CNY) has no chance of replacing the US Dollar as the world's reserve currency.

The BRICS have no choice but to use the USD. Despite Brazilian President Lula da Silva's efforts to create a currency for settling payments among BRICS nations, Bank of America believes that it will take time and require cooperation at multiple levels among countries that are not always able to cooperate well with one another.

Crypto assets are not currencies since they do not function as a means of exchange, a store of value, or a unit of account. They won't pose any threat to the USD as a global currency in the foreseeable future. 

Key Risks That Could Harm the USD's Global Role

Fiscal complacency is the main risk for the USD in the long term, and the U.S. public debt-to-GDP ratio is among the highest among G-10 countries.

During debt limit debates, the U.S.' budgetary brinkmanship, with the prospect of a government shutdown or, worse, a default, keeps coming up and triggers rising cost of insurance against a U.S. default. 

If the Fed is concerned about unsustainable debt dynamics, it may be pushed to adopt loose monetary policies. Therefore, an abuse of such a privilege may erode market trust in the USD.

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