Chinese Yuan's Ascent to Global Reserve Status Faces Several Hurdles
The Chinese yuan's ascent to global reserve currency status faces several hurdles, according to global macro strategists. Montgomery asserts that the "weaponization" of the USD is a significant driving force behind the pursuit of alternatives by Russia, China, and other BRICS nations.
Chinese Yuan is Unlikely to Dethrone the US Dollar
Skylar Montgomery, a senior global macro strategist at Globaldata TS Lombard, an independent investment research group on global macro and strategy, explained the reasons why the yuan is unlikely to dethrone the US dollar as the world's premier reserve currency in a note on Wednesday.
She explained that the global reserve status of the US dollar provides substantial political, economic, and market influence. However, she mentioned that it is increasingly being employed as a political tool, as evidenced by the freezing of Russia's currency reserves in response to the Ukrainian crisis. The strategist described:
"That weaponization of the dollar is part of the reason why Russia, China, and other BRICS nations have vied for an alternative to the dollar."
The recent BRICS summit saw leaders from Brazil, Russia, India, China, and South Africa unite to advocate for the use of local currencies in international trade instead of relying solely on the US dollar. This reflects a broader trend of de-dollarization, with the USD's share in global currency reserves dropping from 72% in 2000 to its current level of 59%.
Despite De-dollarization Trends, the US Dollar Still Holds Strong
Despite this shift, Montgomery highlights that the decline has been gradual and that the US dollar still dominates global currency reserves. She notes that the decrease of less than 1% per year is a slow-moving process, and the dollar continues to be the world’s major reserve currency. The 13% slide in the US dollar has been evenly shared among the euro, British pound, Canadian dollar, Chinese yuan, and Australian dollar.
The strategist explained that the US dollar's continued dominance is primarily due to the absence of a clear alternative. She does not foresee the Chinese yuan making significant inroads into global currency reserves anytime soon, citing factors such as its closed capital account, limited use in international transactions, unpredictable government intervention, and being a managed currency.
Dario Perkins, managing director of global macro at Globaldata TS Lombard, said:
"A reserve country must be willing to run large and persistent current account deficits to provide the rest of the world with their currency needs."
“The US enjoys powerful network effects, including deep capital markets, critical lender-of-last-resort facilities, and the provision of financial services to the rest of the world. Only the US can currently play this role,” she added.
Benn Steil, an economist and director of International Economics at the Council on Foreign Relations, and Zain Vawda, a market analyst at Dailyfx, both argue that the Chinese yuan does not pose a significant threat to the US dollar. Other experts also concur with the same sentiment that the Chinese yuan has a long way to go before challenging the US dollar.
Do you think the Chinese yuan can overtake the US dollar as the world’s reserve currency? Please share your thoughts and opinions in the comments section below.
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