China’s Yuan Can Be The Downfall Of The Dollar

The dollar’s position is not in danger anytime soon, but the yuan and the euro are most likely to cut into their lead.

A “triangular” reserve currency system is plausible, economist Stephen Jane told Insider.

The greenback saw a dramatic erosion as the global reserve currency in 2022, but it is still dominant in international trade.

The dollar has been king for decades, but its slippage as a reserve currency has raised concerns about whether a rival currency will topple it.

But for economist Stephen Jane, CEO of Eurozone SLJ, a more plausible outcome would be multiple currencies cutting into the dollar’s dominance.

He recently pointed out that the greenback’s nominal share in global reserves has shrunk 10 times at a pace seen over the past two decades.

“Our best guess is that this trend is likely to continue, but probably not to the point where a non-dollar currency earns a larger market share than the dollar,” Jane wrote in emailed comments to Insider. “More likely, we will evolve from a unipolar reserve currency world to a multipolar one.”

To be sure, its role in international trade looks impressive, but that doesn’t necessarily prevent its decline as a reserve currency.

When asked which currencies stand the best chance as a challenger, Jane said all others have flaws, especially as international currencies.

“But if I have to guess,” he said, “it should be [euro] And this [yuan] having almost identical appearance. Such a ‘triangular’ reserve currency configuration also makes sense and is more aligned with the economic weight of the three blocs.”

For China in particular, Jen said the country’s financial sector must first improve in quality for the yuan to make progress.

Foreign investors, he explained, are wary of buying into Chinese equities and bonds.

“Without overseas demand for Chinese assets, Chinese savers and households may not be allowed to invest overseas, and thus capital controls will need to be maintained,” the economist said. “With capital controls, it would be difficult to [yuan] To become a viable international currency.”

And while some announcements of bilateral trade are being settled with China’s currency, those volumes are small, and do not compare to the volumes seen in larger financial flows, according to the eurozone.

Talk of de-dollarization has increased of late amid growing signs of a tilt away from the US currency. For the first time, the yuan overtook the US dollar last month as the most widely used currency for Chinese cross-border transactions.

Meanwhile, Ruchir Sharma, chairman of Rockefeller International, said that central banks are moving from the US dollar to gold. He wrote in the Financial Times earlier this month that central banks account for a record 33% of monthly global demand for gold and are buying more gold than at any time since data began in 1950.

Still, the dollar’s share of global currency transactions for trade finance was 83.7% compared to the yuan’s 4.5%, with analysts saying the yuan is too tightly controlled by the Chinese government.

Source: markets.businessinsider.com