A Report by CYS Global Remit Counterparty Sales & Alliance Unit
In the evolving global finance landscape, the U.S. Dollar remains the world’s primary reserve currency. Despite discussions about its sustainability, UBS Global Research presents a bullish view, asserting that the dollar’s dominance will continue. This report explores the factors underpinning this confidence and potential diversifiers in the global currency market.
Continued Dominance of the U.S. Dollar
UBS Global Research views the U.S. Dollar’s position as the primary reserve currency as enduring, supported by:
Sticky Global Currency Regimes: Changes in dominant currencies occur gradually, with the dollar maintaining its status despite economic and political shifts.
Unparalleled Liquidity: The dollar’s dominance in global trade, payments, and derivatives markets provides unmatched liquidity, crucial for reserve managers.
Stability and Safety: The United States’ high ranking in institutional strength indicators and its role as a technological innovator enhance its appeal.
The report acknowledges a potential shift towards a more diversified currency landscape but underscores the dollar’s deep liquidity, stability, and the inertia of global currency regimes. Gold is identified as a key diversifier with increasing central bank purchases expected to push its price higher.
Emerging Pressures and Potential Diversifiers
While the U.S. Dollar’s dominance is expected to persist, UBS notes growing pressures for a diversified currency system due to geopolitical tensions and efforts by countries like China to internationalize the Yuan. Despite these efforts, the dollar’s supremacy is unlikely to be significantly challenged in the near term.
Crucial Diversifier: Gold
UBS identifies gold as an essential diversifier away from the U.S. Dollar, driven by:
Increased Central Bank Buying: Demonstrates growing confidence in gold as a stable store of value.
Lower U.S. Interest Rates: Make gold a more attractive investment.
Recovering ETF Demand: Further supports gold prices. Gold serves as a hedge against geopolitical tensions, fiscal concerns, and inflation, making it a preferred choice for risk-averse investors.
Additional Considerations
UBS also highlights the Swiss Franc as a viable alternative to the U.S. Dollar due to the Swiss National Bank’s restrictive monetary policy, enhancing its appeal for stability and security during global uncertainty.
Conclusion
While the U.S. Dollar faces emerging challenges and a potential shift towards a more diversified currency environment, its unmatched liquidity, stability, and entrenched position in global finance are likely to sustain its role as the world’s primary reserve currency. UBS Global Research underscores the importance of gold and the Swiss Franc as key diversifiers for risk mitigation. Despite making room for competitors, the U.S. Dollar's foundational strengths suggest it will remain a pivotal player in the global economy for years to come.
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