In recent years, there has been increasing speculation about the Chinese Yuan being ready to challenge the US dollar as the world’s dominant reserve currency. However, according to leading financial strategist Sarah Chen, the yuan is not yet ready to dethrone the greenback from its position at the top of the global financial hierarchy. A global macro strategist has outlined why the Chinese yuan is improbable to supplant the U.S. dollar as the dominant global reserve currency. She underscored that one of the primary motivations driving Russia, China, and other BRICS nations to explore alternatives to the dollar is the perceived ‘weaponization’ of the USD
American Dollar versus Chinese Yuan
In a note published on Wednesday, Skylar Montgomery, a senior global macro strategist at Globaldata TS Lombard, an independent research group specializing in global macroeconomics and strategy, expounded on the improbability of the Chinese yuan displacing the U.S. dollar from its role as the world’s primary reserve currency.
She elaborated on how the U.S. dollar’s esteemed position as the global reserve currency “confers a privilege that imparts substantial political, economic, and market influence upon the United States.” Nevertheless, she issued a cautionary note, pointing out that the U.S. government has increasingly employed the USD as a political instrument, exemplified by the West’s decision to freeze Russia’s currency reserves in response to the Ukraine invasion. The strategist remarked:
“ 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.”
BRICS Summit: A Collective Push for Local Currency Trade
At their recent annual summit, the BRICS nations (comprising Brazil, Russia, India, China, and South Africa) reached a consensus to advocate for the utilization of their respective domestic currencies in international trade rather than relying predominantly on the U.S. dollar.
In recognition of the global trend toward reducing reliance on the dollar and the dwindling share of the USD in worldwide currency reserves, which has declined from 72% in 2000 to its current level of 59%, she observed, “A yearly decrease of less than 1% is notably gradual, and the dollar still constitutes the majority of currency reserves… Additionally, the 13% reduction has benefited a range of currencies, including the euro, British pound, Canadian dollar, Chinese yuan, and Australian dollar, in a relatively even manner.”
Obstacles to the Chinese Yuan’s Ascent as a Global Reserve Currency
Montgomery highlighted that the U.S. dollar’s enduring supremacy as the global currency of choice is primarily attributed to the absence of any other currency, including the Chinese yuan, establishing itself as a definitive alternative to the USD.
The strategist expressed scepticism about the Chinese Yuan not being ready yet to substantially expand its portion of global currency reserves in the immediate future. She stated, “Due to a combination of factors, including a controlled capital account, a reluctance or incapacity to run a current account deficit, unpredictable government intervention, and a managed exchange rate, the international adoption of the yuan has remained limited.”
Furthermore, Dario Perkins, the managing director of global macro at Globaldata TS Lombard, offered his insights: “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 Resilience of the U.S. Dollar and Skepticism Toward the Chinese Yuan
“The United States benefits from potent network effects, encompassing extensive capital markets, essential lender-of-last-resort mechanisms, and its ability to provide financial services to the global community. This role, currently, remains exclusive to the U.S.,” she emphasized.
Others have echoed similar sentiments, with economist Benn Steil, who serves as the director of International Economics at the Council on Foreign Relations, expressing the view that the Chinese yuan poses no significant threat to the U.S. dollar. Additionally, Zain Vawda, a market analyst at Dailyfx, recently observed that the recent fluctuations and volatility experienced by the Chinese yuan further complicate the process of de-dollarization.
While there is ongoing discourse about the potential rise of the Chinese yuan as a global reserve currency, experts like Sarah Chen, Skylar Montgomery, and others argue that the U.S. dollar’s position remains firmly entrenched. The dollar’s robust network effects, deep capital markets, and global financial services role are formidable advantages. Additionally, the controlled nature of the yuan, its limited convertibility, and recent volatility continue to hinder its ascent. Despite trends toward de-dollarization, the consensus suggests that the Chinese yuan is not yet poised to replace the U.S. dollar as the world’s dominant reserve currency anytime soon.
Also Read: Economist Peter Schiff Warns about Biden and his Bidenomics.
