The biggest risk of de-dollarization isn't a rival currency — it's that the US could lose a key tool it's used to fight past economic crises, according to JPMorgan.
  • According to a note on Tuesday, strategists led by Marko Kolanovic said de-dollarization risks are unlikely to mean emerging powers will suddenly stop using the dollar or replace it with another currency.
Instead, the key de-dollarization risk that Western economies face is mostly related to inflation and their debt burdens, they explained.

"Historically, imported deflation via trade with the global South and East, outsourcing less profitable segments of economy, recycling of trade surpluses into USD assets, and domestic energy independence (US shale growth), were key ingredients to the USD supremacy," JPMorgan said. 

"Imported deflation and debt demand has allowed Western central banks to successfully navigate every recent economic crisis with a combination of monetary and fiscal measures."

  • But as world economies de-couple from each other or come into outright conflict while energy prices rise, these crisis measures will be at risk, potentially triggering inflation and debt spirals for the West, strategists warned.
  • Fitch's recent downgrade of the US credit rating to AA from AAA is a reminder that there is a risk of such a scenario, even if it is low, they added.

"This risk is magnified by environmental 'arbitrage', where carbon intensive industries such as manufacturing, commodity production, etc., were outsourced to the East, leaving the West industrially fragile and susceptible to inflation shocks," JPMorgan said.

  • In fact, the West's inability over the past year to produce sufficient supplies of natural gas, cheap food, or munitions for Ukraine are some examples, it said.
In a separate note from Thursday, JPMorgan analysts pointed out signs of de-dollarization already taking root. 
  • Looking at the oil market, the commodity is increasingly being transacted in non-dollar currencies, such as the yuan.
But while JPMorgan expects "marginal de-dollarization," to take place, the pace is not expected to be rapid. This is because the dollar is just too widely used in a vast global financial ecosystem.

"Instead, partial de-dollarization — in which the renminbi assumes some of the current functions of the dollar among non-aligned countries and China's trading partners — is more plausible, especially against a backdrop of strategic competition," the analysts added