De-dollarization: Despite China's Aggression, 3 Reasons Dollar Will Remain Hegemonic Currency

De-dollarization: Despite China’s Aggression, 3 Reasons Dollar Will Remain Hegemonic Currency

Efforts by China to turn its yuan into a top global reserve currency have sparked fears about the potential downfall of the US dollar, but that’s not happening any time soon according to one Wall Street strategist.

As the world’s second largest economy, China has been working towards better incorporating it’s Yuan currency into various facets of global trade for years.

In 2016, the yuan was added to the International Monetary Fund’s Special Drawing Rights basket of currencies, which serve as a supplementary international reserve asset. Other currencies in the basket include the US dollar, the euro, the British pound sterling, and the Japanese yen.

From there, China aggressively sought out trade agreements to help extend the global reach of the yuan, having struck deals with Russia, Saudi Arabia, Brazil and Italy, among others.

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One of China’s key arguments when working with other countries is to “de-weaponize” the dollar, as the US has long used sanctions to target its adversaries, and those sanctions only work because of how globally entrenched the dollar is, with the currency making up 60% of foreign exchange reserves.

China itself has been transitioning away from the US dollar, with the People’s Bank of China stockpiling gold to an estimated 2,068 tons.

But LPL’s chief global strategist Quincy Krosby offered three reasons why the US dollar’s reign as the world’s top global reserve currency is here to stay in a Monday note, and the reasons are rather simple.

For a currency to ascend to the ranking of the world’s top global reserve currency, it requires the three following traits:

  • Transparency
  • Reliability
  • Credibility

Those are three characteristics that the US dollar has and the Chinese yuan doesn’t have, and they’re important because they offer stability to foreign holders.

“The dollar’s backing is exemplified by a sound foundation, a history of credibility, and transparency that cannot be negated by its detractors,” Krosby said in a Monday note. “King dollar still reigns and will for the foreseeable future.”

The second biggest foreign currency is the euro, which since its inception in 1999 has become an important part of global trade and represents 20% of global currency reserves. But its ascent from 20% is likely limited “because of its fragmented political and economic structure,” Krosby said.

Finally, the Chinese yuan represents just 2.7% of foreign currency reserves, which is about half of the Japanese yen’s 5.5% share. The yuan has a lot of work to do if it ever wants to rival the dollar, and until it gains those three key traits, it likely won’t happen any time soon.


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