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The dollar's dominance is here to stay as China's zero-COVID strategy hurts the yuan, a Morgan Stanley strategist says

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US dollar printing
The dollar is the most important currency in the world.EVA HAMBACH/Getty Images
  • The dollar's global dominance is here to stay for a "very long time," according to a Morgan Stanley strategist.

  • James Lord told Insider that China's zero-COVID policy is denting the yuan's appeal, at least in the short term.

  • The US freeze on Russia's currency reserves has cast doubt on the dollar's reliability, but Lord said the fears are overblown.

The dollar will be the world's global reserve currency for "a very long time," according to a Morgan Stanley strategist who said China's strict zero-COVID policy is hurting the appeal of the yuan.

A move by the US and its allies in late February to freeze much of Russia's foreign-exchange reserves has raised questions about the global dominance of the dollar.

Some analysts have said countries may want to diversify their reserve holdings away from the greenback, in an effort to reduce the US' power over the global economy.

But James Lord, a top FX strategist at the bank, told Insider this week: "The US dollar is going to be the world's dominant reserve currency for a very long time to come."

The strategist said the dollar seems like "the cleanest dirty shirt", as the world economy deals with slowing growth and high inflation.

The fact that the EU and other countries also froze Russia's assets helps the case for the buck, he said.

"The US dollar is probably going to be — for most reserve managers, maybe not all, but for most reserve managers — the safest asset," he said.

"There was a lot of talk about whether or not the sanctions on the Central Bank of Russia's assets were going to spark an acceleration away from the dollar. And I don't think that that's the case."

The Chinese yuan, which is essentially the same as the renminbi, has been mooted as an alternative. Saudi Arabia accelerated talks with China over pricing oil sales in yuan in March, raising concerns about the dollar's position.

But Lord said the yuan does not look appealing to investors right now, with China's strict approach to containing COVID weighing on the currency. It has fallen around 7% against the dollar this year.

"The zero-COVID strategy is obviously causing market concern," he said. "So I think that that's posing a bit of a short-term headwind for this sort of story about a rising renminbi."

Many analysts have said China's yuan does not look like an attractive reserve asset, because of Beijing's strict control over the economy.

Lord said the buck's recent strength — the dollar index has risen 9% this year — is largely because it is the world's de facto currency.

Roughly 40% of world trade is invoiced in dollars, and the US currency makes up around 60% of global foreign-exchange reserves.

"It's more by default, really, that people are constructive on the dollar. Because I think if people could sell every currency in the world, they probably would do," Lord said.

Read more: Cash is king for retail traders right now, according to 7 investors who expect a prolonged bear market for stocks, bonds, and cryptocurrencies

Read the original article on Business Insider

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