In the absence of a reliable competitor, the US dollar is likely to remain the world's dominant reserve currency. Morgan Stanley notes that the Chinese yuan, which is often seen as a potential competitor to the US dollar, is currently depreciating and is unlikely to cause the dollar to collapse.
Reserve managers understand the US dollar
According to US financial services giant Morgan Stanley, the dollar's status as the dominant reserve currency is likely to continue as it currently has no reliable rival. Morgan Stanley reportedly said in an April 18 memo that it lacked competitors such as the Chinese yuan. Therefore, reserve managers have no choice but to deal with the dollar.
Morgan Stanley's strong statement comes as concerns about rising U.S. debt levels and geopolitical risks have sparked debate over the dollar's future as the world's reserve currency. The US government's weaponization of the dollar has also fueled critics calling for alternatives to the dollar.
Members of the BRICS economic bloc have called for the issuance of an alternative reserve currency, but have not announced when such a currency would be issued. The bloc's last major meeting saw sharp disagreements as some member states called for local currencies to be used for trade settlements rather than the single currency.
China has no interest in making the renminbi its reserve currency.
The Chinese yuan is often cited as the currency likely to dethrone the US dollar, but many speculate that China has no interest in having its currency become the world's reserve currency. To support their argument, observers point to China's strict capital controls that make it difficult to move large sums of money out of the country.
Some believe that for a currency to achieve reserve status, central banks and large financial institutions need to hold large amounts of it. Additionally, it should be used for international transactions such as investments and international debt. Observers point to China's capital controls and believe the yuan is unlikely to become the world's reserve currency anytime soon.
Although there is no reliable alternative, the Reuters report said there are some signs that reserve managers may already have started diversifying away from the dollar. However, the US investment bank concluded in a report that the current problems will not lead to a collapse of the US dollar.
“Despite ongoing challenges from an increasingly multipolar world, we expect the US dollar to remain the dominant reserve currency. Although we expect a period of weak valuations, this should provide long-term support.»