US dollar's reserve currency status to persist despite yuan's shortcomings: Report

US dollar's reserve currency: Morgan Stanley's latest report suggests that the US dollar's position as the dominant reserve currency is expected to endure, with the Chinese yuan falling short as a credible challenger. The report, released on Thursday, highlights various factors contributing to the dollar's resilience, including global economic metrics favoring the dollar and challenges faced by potential competitors.

Factors such as the ongoing rivalry with China, Russia's military actions in Ukraine, US debt ceiling debates, and rising debt levels have recently raised questions about the dollar's status. However, Morgan Stanley remains confident in the dollar's dominance, citing its significant influence on the global economy.

While some countries may seek alternatives to the dollar due to concerns about the fiscal outlook and Washington's use of economic sanctions, Morgan Stanley believes that transitioning away from the dollar will be challenging. The report notes that while China's yuan is often discussed as a potential competitor, its international appeal is limited by challenges such as debt, deflation, and demographics.

Morgan Stanley predicts only a modest increase in the yuan's share of currency reserves, from 2.3 per cent to 5 per cent by 2030. The report emphasises that even small changes in percentage terms can lead to significant nominal changes due to the large size of global currency reserves and trade volumes.

Regarding the impact of a potential loss of dominance, Morgan Stanley suggests that it could lead to higher interest rates and a weaker currency. Despite short-term strength for the dollar, driven by factors like sticky inflation and geopolitical tensions, the report expects only a moderate and gradual decline in the dollar's international use, given the current global economic landscape.

(with Reuters inputs)