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Why Chinese yuan will struggle to challenge the dominance of the US dollar

Chinese yuan US dollar

Despite slow and steady global de-dollarization, the Chinese yuan has little chance of dethroning the US dollar. It makes sense for China to want its yuan, or a collective of other currencies, to break up the dominance of the dollar, according to a note by GlobalData TS Lombard’s Skylar Montgomery.

Montgomery says the dollar’s reserve status gives the US significant political, economic, and market influence, but it also hurts other nations.

Due to the fact that most emerging market trade is in dollars, any appreciation in the greenback means higher import prices for other countries.

A strong US dollar also amplifies energy price shocks and gives the US government leverage when it comes to using it as a political weapon, such as when it froze Russia’s currency reserves after Moscow invaded Ukraine.

In response to the weaponization of the dollar, Russia, China, and other BRICS nations have sought alternatives to the dollar,” Montgomery said.

Yes, de-dollarization is still taking place, but at a very slow pace.

The dollar’s share of global currency reserves, which has dropped from 72% in 2000 to 59% today, is the clearest sign of de-dollarization.

According to her, a decline of less than 1% a year is extremely slow-moving. “Moreover, the 13% decline has benefited [the] euro, British pound, Canadian dollar, Chinese yuan, and Australian dollar fairly equally.”

There is no alternative to the US dollar, which is one of the top reasons why it will continue to reign supreme over the yuan.

A clear replacement for the US dollar has not emerged, especially based on reserve data. The euro has 19.7% of reserves, while the yuan has just 2.6%.

According to the note, China’s yuan is unlikely to gain much share of global currency reserves.

“Yuan’s closed capital account, unpredictable government intervention, and managed currency have limited its international use,” Montgomery explained.

The BRICS currencies also face a lot of headwinds in taking away the dollar’s influence.

BRICS state growth is plummeting, China and India have conflicting strategic interests, and the bloc will have difficulty justifying its economic purpose, the note said.

Therein lies the benefit of the US dollar’s reserve status.

Providing the rest of the world with currency requires a reserve country to run large and persistent current account deficits. As well as deep capital markets and critical lender-of-last resort facilities, the US provides financial services to the rest of the world, creating powerful network effects. According to TS Lombard’s Dario Perkins, this role can only be played by the US currently.

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