(Bloomberg) -- For all the concern about the US dollar losing its dominance in international trade and the finance world, Moody’s Investors Service has a message: the greenback will likely retain its crown despite all the challenges.
“We expect a more multipolar currency system to emerge over the next few decades, but it will be led by the greenback because its challengers will struggle to replicate its scale, safety and convertibility in full,” Moody’s analysts wrote in a note Thursday.
That’s not to say the ratings firm doesn’t see any risks in the short term.
A US pivot to protectionism, weakening institutions and the risk of a default would threaten the dollar global dominance, Moody’s said.
“The greatest near-term danger to the dollar’s position stems from the risk of confidence-sapping policy mistakes by the US authorities themselves, like a US default on its debt for example,” the report said. “Weakening institutions and a political pivot to protectionism threaten the dollar’s global role.”
Even if a default on the US government debt would be rapidly shored up, it would “permanently” hurt US treasury holdings as risk-free assets, according to Moody’s. The debt-ceiling standoff sent jitters to financial markets. US officials signaled Thursday that they made some progress but no deal has been reached yet as the clock continues ticking down to the point when the Treasury runs out of cash.
The tension around the US debt-limit negotiations ratcheted up after Fitch Ratings warned the nation’s AAA rating was under threat from a political standoff that’s preventing a deal. Moody’s hasn’t made any adjustments to its outlook in the wake of the wrangling in Washington to lift the nation’s borrowing capacity.
“Although we expect that politicians will eventually agree to raise or suspend the debt limit and avoid a default on government debt, greater polarization in the domestic political environment over the last decade has weakened both the predictability and effectiveness of US policymaking,” the report said. “Sanctions further inhibiting the free flow of the dollar in global trade and finance could encourage greater diversification.”
The US dollar liquidity, safety and lower transaction costs will ensure its domination to continue in the international trade and finance, Moody’s concludes, citing also the lack of viable alternatives. The central banks have reduced the share of the dollar holdings to 58% from 71% in 2000, while boosting allocations to the renminbi, the Australian and the Canadian dollars, the report said.
A gauge of the dollar strength gained for a fourth day, the longest rising streak since October. The greenback is on track to gain 1.7% in value in May after two months of declines.
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