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JPMorgan: We Believe The Dollar Could Lose Its Status As World’s Reserve Currency

JPMorgan: We Believe The Dollar Could Lose Its Status As World’s Reserve Currency thumbnail

Almost eight year ago, we first presented a chart first created by JPMorgan’s Michael Cembalest, which showed very simply and vividly that reserve currencies don’t last forever, and that in the not too distant future, the US Dollar would also lose its status as the world’s most important currency, since it is never different this time.

As Cembalest put it back in January 2012, “I am reminded of the following remark from late MIT economist Rudiger Dornbusch: ‘Crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.'”

Perhaps it is not a coincidence then that in light of the growing number of mentions of MMT and various other terminal, destructive monetary policies that have been proposed to kick on the current financial system the can just a little bit longer, that the topic of longevity of reserve currency status is once again becoming all the rage, and none other than JPMorgan’s Private Bank ask in this month’s investment strategy note whether “the dollar’s “exorbitant privilege” is coming to an end?”

So why is JPM, after first creating the iconic chart above which has since spread virally across all financial corners of the internet, not only worried that the dollar’s reserve status may be coming to an end, but in fact goes so far as to state that “we believe the dollar could lose its status as the world’s dominant currency (which could see it depreciate over the medium term) due to structural reasons as well as cyclical impediments.”

Read on to learn why even the largest US bank has started to lose faith in the world’s most powerful currency.

Is the dollar’s “exorbitant privilege” coming to an end?

In Brief

The U.S. dollar (USD) has been the world’s dominant reserve currency for almost a century. As such, many investors today, even outside the United States, have built and become comfortable with sizable USD overweights in their portfolios. However, we believe the dollar could lose its status as the world’s dominant currency (which could see it depreciate over the medium term) due to structural reasons as well as cyclical impediments.  

As such, diversifying dollar exposure by placing a higher weighting on other currencies in developed markets and in Asia, as well as precious metals makes sense today. This diversification can be achieved with a strategy that maintains the underlying assets in an investment portfolio, but changes the mix of currencies within that portfolio. This is a completely bespoke approach that can be customized to meet the unique needs of individual clients.

The rise of the U.S. dollar

It is commonly perceived that the U.S. dollar overtook the Great British Pound (GBP) as the world’s international reserve currency with the signing of the Bretton Woods Agreements after World War II. The reality is that sterling’s value was eroded for many decades prior to Bretton Woods. The dollar’s rise to international prominence was fueled by the establishment of the Federal Reserve System a little over a century ago and U.S. economic emergence after World War I. The Federal Reserve System aided in the establishment of more mature capital markets and a nationally coordinated monetary policy, two important pillars of reserve-currency countries. Being the world’s unit of account has given the United States what former French Finance Minister Valery d’Estaing called an “exorbitant privilege” by being able to purchase imports and issue debt in its own currency and run persistent deficits seemingly without consequence.

The shifting center

There is nothing to suggest that the dollar dominance should remain in perpetuity. In fact, the dominant international currency has changed many times throughout history going back thousands of years as the world’s economic center has shifted.

After the end of World War II, the U.S. accounted for biggest share of world GDP at more than 25%.  This number is brought to more than 40% when we include Western European powers. Since then, the main driver of economic growth has shifted eastwards towards Asia at the expense of the U.S. and the West.  China is at the epicenter of this recent economic shift driven by the country’s strong growth and commitment to domestic reforms.  Over the last 70 years, China has quadrupled its share of global GDP to around 20%—roughly the same share as the U.S.—and this share is expected to continue to grow in the years ahead. China is no longer just a manufacturer of low cost goods as a growing share of corporate earnings is coming from “high value add” sectors like technology.

China regaining its status as a global superpower

Source: Angus Maddison Database, IMF, J.P. Morgan Private Bank Economics. Data as of June 14, 2019

Earnings in China are becoming more balanced

Source: Bloomberg, J.P. Morgan Private Bank Economics. Data as of September 30, 2018. The low-value added sectors series is HP filtered to smooth over cyclical volatility. Low-value added includes materials and industrials. High-value added includes tech, health care, consumer staples, and consumer discretionary.

In addition to China, the economies of Southeast Asia, including India, have strong secular tailwinds driven by younger demographics and proliferating technological know-how. Specifically, the Asian economic zone—from the Arabian Peninsula and Turkey in the West to Japan and New Zealand in the East and from Russia in the North and Australia in the South—now represents 50% of global GDP and two-thirds of global economic growth. Of the estimated $30 trillion in middle-class consumption growth between 2015 and 2030, only $1 trillion is expected to come from today’s Western economies. As this region grows, the share of non-USD transactions will inevitably increase which will likely erode the dollar’s “reserveness”, even if the dollar isn’t replaced as the dominant international currency.

In other words, in the coming decades we think the world economy will transition from U.S. and USD dominance toward a system where Asia wields greater power. In currency space, this means the USD will likely lose value compared to a basket of other currencies, including precious commodities like gold.

Dollar’s declining role already under way?

Recent data on currency reserve holdings among global central banks suggests this shift may already be under way.  As a share of overall central bank reserves, the USD’s role has been declining ever since the Great Recession (see chart). The most recent central bank reserve flow data also suggests that for the first time since the euro’s introduction in 1999, central banks simultaneously sold dollars and bought euros.

Central banks across the globe are also adding to gold reserves at their strongest pace on record. 2018 saw the strongest demand for gold from central banks since 1971 and a rolling four-quarter sum of gold purchases is the strongest on record. To us, this makes sense: gold is a stable source of value with thousands of years of trust among humans supporting it.

USD share of central bank reserves, %

Source: Exante. Data as of September 30, 2018. The series is FX-adjusted. 

Source: Bloomberg as of June 13, 2019

Given the persistent—and rising—deficits in the United States (in both fiscal and trade), we believe the U.S. dollar could become vulnerable to a loss of value relative to a more diversified basket of currencies, including gold. As we scan client portfolios, we see that many of them have far more U.S. dollar exposure than we feel is prudent. At this stage of the economic cycle, we believe this exposure should be more diversified. In many cases, our recommendation would likely be to place a higher weighting on other G10 currencies, currencies in Asia and gold (see chart).

FX exposure

Source: J.P. Morgan Private Bank as of June 13, 2019.

 

zerohedge



330 Comments on "JPMorgan: We Believe The Dollar Could Lose Its Status As World’s Reserve Currency"

  1. Anonymouse on Tue, 30th Jul 2019 4:07 pm 

    Mystery Airstrikes On Iraqi Camp Were Israeli Stealth Jets In “Anti-Iran” Escalation
    Regional experts had immediately suspected the possibility of an Israeli air raid after a pro-Iranian militia arms depot in Iraq was obliterated during a mysterious attack on July 19, and another reported follow-up attack this past Sunday.

    The attack happened around 80 km from the Iranian border and 40 km north-east of Baghdad at Camp Ashraf, former home to the Iranian exile group Mojahedin-e Khalq, but now reportedly in the hands of Iranian intelligence and paramilitaries.

    Speculation was rampant in the days that followed as to the source of the ‘mysterious’ air strikes – or what was also initially reported as a drone strike – however, some pointed the finger at an American operation targeting Iranian militants inside Iraq.

    Israeli F-35 stealth fighters. File image: Israeli Defense Forces

    Iran Is Johnson’s First Crisis, Not Brexit, Hormats Says
    But now Israeli and regional media, citing western diplomats, have confirmed it was a nearly unprecedented Israeli operation on Iraqi soil — representing a major escalation and expansion of Israel’s anti-Iran operations.

    Israel reportedly launched a total of two separate air strike operations on the camp using its US-supplied F-35 stealth fighter jets.

    According to the Israeli newspaper Haaretz:

    Israel has expanded the scope of its anti-Iranian attacks and struck targets in Iraq, the London-based Arabic newspaper Asharq Al-Awsat reported Tuesday.

    According to the report, which cites anonymous Western diplomats, Israel struck Iranian warehouses storing arms and missiles at Camp Ashraf, north-east of Baghdad, twice in the past month.

    On July 19, the base was struck by an Israeli F-35 fighter jet, the sources added. The base was allegedly attacked again on Sunday.

    The report alleges the primary target included a shipment of Iranian ballistic missiles which recently entered Iraq via the nearby Iranian border.

    And though not confirmed, the report further claimed that “Iranian advisers” had been injured in the series of airstrikes.

    Israel has over the past couple of years conducted “hundreds” of attacks inside Syria, which defense officials have claimed were primarily against Iranian and Hezbollah bases, but if this month’s air strikes on Camp Ashraf are confirmed Israeli assaults, it would constitute a major widening in terms of the scope of Tel Aviv’s “anti-Iran” targeting operations.

    The news is also sure to enrage officials in Baghdad, who will mount protests defending Iraqi sovereignty. Israel hasn’t mounted a known significant attack on Iraqi soil since the days of former dictator Saddam Hussein.

  2. JuanP on Tue, 30th Jul 2019 6:12 pm 

    Judge Tosses ‘Meritless’ DNC Lawsuit Against Trump, Russia, Assange, WikiLeaks And The Kitchen Sink
    A federal judge has tossed out a lawsuit brought by the Democratic National Committee against a laundry list of defendants they blamed for a conspiracy to ‘steal’ the 2016 US election from former Secretary of State Hillary Clinton. Defendants included the Russian Federation, the Trump Campaign, Donald Trump Jr., Paul Manafort, Jared Kushner, George Papadopoulos, Richard Gates, Roger Stone, Joseph Mifsud, WikiLeaks, Julian Assange and several Russians. In his Tuesday afternoon order, judge John G. Koeltl of the Southern District of New York ruled that the DNC’s arguments were “either moot or without merit.” Following the April release of the Mueller report, lawyers for most of the defendants asked the court to penalize the DNC for alleging a conspiracy between the Trump campaign and Russia – arguing that Mueller’s findings revealed the “doomed effort to prove a falsehood.” “The assumption, of course, was that the Special Counsel would substantiate the DNC’s claims,” wrote lawyers for the Trump campaign. “Suffice it to say, that assumption did not pan out.” The campaign’s lawyers said the report “debunks any such conclusion by walking through the vast body of evidence that his Office collected and establishing that none of this evidence showed that the Campaign formed any sort of agreement with Russia.” They said the report shows the DNC can never prove its key allegations, “yet has refused to accept this reality.” “The DNC has thus made clear that it wants to proceed with a politically motivated sham case, tying up the resources of this Court and the Campaign — and inevitably burdening the President himself — all in a doomed effort to prove a falsehood,” the lawyers wrote. The lawyers included exhibits with their filing showing that Trump campaign attorney Michael Carvin sent the DNC a May 13 letter demanding that it dismiss all of its claims against the campaign within three weeks or he’d seek sanctions. -AP Developing…

  3. makati1 on Tue, 30th Jul 2019 6:24 pm 

    Is Davy copying and pasting again under other names? Neither of the above comments are typical of either poster. Davy is the poster boy of Amerika’s insanity.

  4. Davy on Tue, 30th Jul 2019 6:34 pm 

    Come on makati, your lunatic friend is off his meds running wild and you are accusing me of something. Rope in your gang buddy with some daddy talk. Maybe he will listen to you. You three butt breaths (makato, annoymouse, and juanpee) have ruined this forum. You in particular have instigated all kinds of hate and discontent which developed into juanpee activity. I am so glad you are rarely here anymore.

  5. Davy Identity Theft on Tue, 30th Jul 2019 6:42 pm 

    Anonymouse on Tue, 30th Jul 2019 4:07 pm

    JuanP on Tue, 30th Jul 2019 6:12 pm

  6. Delusional Davy Insanity on Tue, 30th Jul 2019 6:55 pm 

    your lunatic friend is off his meds

    Rope in your gang buddy with some daddy talk.

    (makato, annoymouse, and juanpee) have ruined this forum.

    You in particular have instigated all kinds of hate and discontent which developed into juanpee activity.

  7. makati1 on Tue, 30th Jul 2019 7:02 pm 

    good work Juan. Together we will rid this forum of Davy. Just be patient.

  8. More Davy Identity Theft on Tue, 30th Jul 2019 8:23 pm 

    makati1 on Tue, 30th Jul 2019 7:02 pm

  9. makati1 on Tue, 30th Jul 2019 8:47 pm 

    “…off his meds…” Look in the mirror Davy. Hypocrisy again.

  10. Douglas Gardens on Wed, 31st Jul 2019 7:43 am 

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    The Center is a recovery-based model of care for co-occurring treatment. We use assessment tools that reflect strength-based recovery approaches and self-directed care. Our treatment plans incorporate Wellness Recovery Action Plans (WRAP). We have a self-assessment tool and procedure as part of the intake process (ROSI). Implemented evidence based practice modules into group interventions (Social Rehabilitation). Recovery and Wellness materials are used in outpatient, case management, and residential mental health services. We have an established peer counseling program including peer-facilitated support groups and clubs. Staff and Peers have been trained utilizing the “Train the Trainer” format and are active in coordinating Recovery -Oriented Mental Health Services. We do didactic training addressing co-occurring disorders through the CCISC Partnership and the administration of the baseline surveys (COMPASS and CODECAT).

  11. More Davy Sock Puppetry on Wed, 31st Jul 2019 9:10 am 

    Douglas Gardens on Wed, 31st Jul 2019 7:43 am

  12. Douglas Gardens on Wed, 31st Jul 2019 9:33 am 

    We specialize in those with multiple personality disorders, obsessive compulsive behavior both leading to stalking behavior. This regularly is expressed by cyber bullying for months on end leading to a decline in quality of life. These people are often chronically depressed combine with a disdain for humans in general. They often blurt out sexual fantasies and perversions. If you fit this description please call us at:

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  13. More Davy Sock Puppetry on Wed, 31st Jul 2019 10:10 am 

    Douglas Gardens on Wed, 31st Jul 2019 9:33 am

  14. JuanP mental illness on Wed, 31st Jul 2019 10:33 am 

    More Davy Sock Puppetry said Douglas Gardens on Wed, 31st Jul 2019 9:33 am
    More Davy Identity Theft said JuanP on Wed, 31st Jul 2019 9:42 am
    More Davy Identity Theft and Projections said JuanP on Wed, 31st Jul 2019 9:40 am “IMA, WTF any…
    More Davy Identity Theft said JuanP on Wed, 31st Jul 2019 9:35 am JuanP on Wed,…

  15. JuanP on Wed, 31st Jul 2019 10:42 am 

    Newt Gingrich says President Trump could not have hoped for a better Dem debate
    It was a really good night for Donald Trump. He could hardly have hoped for a better debate. You had a handful of rational moderates, [like] Congressman Delaney. Their soundbites are perfect and could replace half of the Trump ads next year because they come out and tell the truth. This stuff is crazy,” said Gingrich, noting the far-left proposals from the candidates on immigration and health care. He said Sen. Bernie Sanders, I-Vt., came off as “angry” and “frustrated” many times during the debate. BERNIE SANDERS SHUTS DOWN 2020 OPPONENT’S ‘MEDICARE-FOR-ALL’ CRITICISM WITH EYEBROW-RAISING RETORT “He really was, as somebody said, like the angry uncle who showed up at Thanksgiving and nobody wanted to set him off,” he joked. Gingrich said Sanders has at least been honest about raising middle-class taxes to pay for his version of “Medicare-for-all.” Fox News Flash top headlines for July 31Video “The core of the Democratic Party is very, very left-wing and almost irrationally anti-Trump,” he said, adding that they are not having a “rational debate” about taking away health insurance “from 180 million people.” CLICK TO GET THE FOX NEWS APP He said he’s interested to see how the primaries play out as moderate candidates try to push back against progressives. “The challenge you have is among the most active Democrats, they are so polarized now that they say things that when you think about it, are totally irrational,” he said.

  16. JuanP on Wed, 31st Jul 2019 10:43 am 

    oops sorry this is a zero hedge article

  17. More Davy Sock Puppeering on Wed, 31st Jul 2019 10:50 am 

    JuanP mental illness on Wed, 31st Jul 2019 10:33 am

  18. More Davy Identity Theft on Wed, 31st Jul 2019 10:51 am 

    JuanP on Wed, 31st Jul 2019 10:42 am

    JuanP on Wed, 31st Jul 2019 10:43 am

  19. Davy on Wed, 31st Jul 2019 11:07 am 

    Hey y’all, did I mention that I am spending less time on this lame unmoderated forum to concentrate on my own blog? I think I might of.

    Does that make me a compulsive liar? Well YES, it does.

  20. obviously juanpee on Wed, 31st Jul 2019 12:12 pm 

    Davy on Wed, 31st Jul 2019 11:07 am
    Hey y’all, did I mention that I am spending less time”

  21. obviously NOT juanpee on Wed, 31st Jul 2019 12:38 pm 

    JuanP stopped commenting here 6 months ago.

    dumbass

  22. Obviously juanpee is a liar on Wed, 31st Jul 2019 1:21 pm 

    obviously NOT juanpee on Wed, 31st Jul 2019 12:38 pm
    JuanP stopped commenting here 6 months

  23. Obviously I am sick on Wed, 31st Jul 2019 1:29 pm 

    I can’t help myself.

  24. Davy on Wed, 31st Jul 2019 1:33 pm 

    Maybe I need to spend less time on this lame unmoderated forum and concentrate on my own blog.

    Everyone else would like that a lot.

  25. Not Davy on Wed, 31st Jul 2019 2:44 pm 

    Davy on Wed, 31st Jul 2019 1:33 pm Maybe I need to spend less time”

  26. Not the Real Davy on Wed, 31st Jul 2019 4:11 pm 

    Not Davy on Wed, 31st Jul 2019 2:44 pm

  27. More Davy Sock Puppets on Wed, 31st Jul 2019 4:23 pm 

    obviously juanpee on Wed, 31st Jul 2019 12:12 pm

    obviously NOT juanpee on Wed, 31st Jul 2019 12:38 pm

    Obviously juanpee is a liar on Wed, 31st Jul 2019 1:21 pm

    Obviously I am sick on Wed, 31st Jul 2019 1:29 pm

    Not Davy on Wed, 31st Jul 2019 2:44 pm

    Not the Real Davy on Wed, 31st Jul 2019 4:11 pm

  28. illegal undocumented juanpee fraud on Wed, 31st Jul 2019 4:24 pm 

    More Davy Sock Puppets on Wed, 31st Jul 2019 4:23 pm

  29. ICE on Wed, 31st Jul 2019 4:25 pm 

    juanpee, go home to your failed south america you undocumented sludge from the south

  30. More Docu-demented Davy Sock Puppeering on Wed, 31st Jul 2019 4:29 pm 

    illegal undocumented juanpee fraud on Wed, 31st Jul 2019 4:24 pm

    ICE on Wed, 31st Jul 2019 4:25 pm

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