A global macro strategist has explained that the Chinese yuan is unlikely to replace the U.S. dollar as the global reserve currency. She emphasized that the “weaponization” of the USD is one of the top reasons why Russia, China, and other BRICS nations have been seeking an alternative to the dollar.
US Dollar v Chinese Yuan
Skylar Montgomery, senior global macro strategist at Globaldata TS Lombard, an independent investment research group focusing on global macro and strategy, explained in a note on Wednesday that the Chinese yuan is unlikely to replace the U.S. dollar as the world’s reserve currency.
She detailed that the U.S. dollar’s global reserve currency status “is a privilege that gives the U.S. significant political, economic, and market influence.” However, she cautioned that the U.S. government is using the USD as a political tool, as seen in the West’s action to freeze Russia’s currency reserves in response to the invasion of Ukraine. 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 BRICS countries (Brazil, Russia, India, China, and South Africa) recently concluded their annual summit, and the leaders of the economic bloc agreed to promote the use of local currencies in international trade, rather than relying on the U.S. dollar.
While acknowledging a worldwide de-dollarization trend and the decline of the USD’s share in global currency reserves from 72% in 2000 to the current level of 59%, she said: “A decrease of less than 1% a year is extremely slow-moving and the dollar still makes up the majority of currency reserves … Moreover, the 13% decline has benefited [the] euro, British pound, Canadian dollar, Chinese yuan, and Australian dollar fairly evenly.”
Montgomery explained that one of the top reasons why the U.S. dollar will continue to be the world’s dominant currency is because no currency, including the Chinese yuan, has emerged as a clear alternative to the USD.
The strategist does not expect the Chinese yuan to significantly increase its share of global currency reserves in the near future, stating: “As a closed capital account, the unwillingness/inability to run a current account deficit, unpredictable government intervention and a managed currency have meant limited use of [yuan] internationally.”
In addition, Dario Perkins, managing director of global macro at Globaldata TS Lombard, explained:
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 U.S. 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 U.S. can currently play this role,” she added.
Some others have similarly said that the Chinese yuan is not a threat to the U.S. dollar, including economist Benn Steil, director of International Economics at the Council on Foreign Relations. Furthermore, Zain Vawda, a market analyst at Dailyfx, recently stated that the recent decline and volatility in the Chinese yuan make de-dollarization more challenging.
Do you think the Chinese yuan can overtake the U.S. dollar as the world’s reserve currency? Let us know in the comments section below.