Can the yuan dethrone the US dollar as the world’s reserve currency?

[jhungary]

Can the yuan dethrone the US dollar as the world’s reserve currency?

The US dollar index (DXY) continued its downward trend this week after Federal Reserve minutes pointed to a recession later this year.

invezz.com

The US dollar index (DXY) continued its downward trend this week after Federal Reserve minutes pointed to a recession later this year. And with inflation falling, there is a possibility that the Fed will start pivoting soon. The DXY index was trading at $100.49, ~15% below the highest point in 2022.

The Chinese yuan, on the other hand, has been in a strong bullish trend. According to TradingView, the USD/CNY pair was trading at 6.831 on Friday, down by 6.70% from its 2022 high. This performance happened as the Chinese economy reboots after last year’s Covid-zero strategy.


So, as the US dollar and the Chinese yuan diverge, there are some concerns about whether the US dollar will maintain its reserve currency status.

DXY index vs USD/CNY

Global discomfort about the US dollar status​

The reality is that there is a global discomfort about the role of the US dollar a the world’s reserve currency. These concerns are both happening among America-friendly countries and foes like Russia and China. Among European allies, there has always been a concern about why the euro is not as popular as the greenback.

The situation, I believe, has gotten worse during the Covid-19 pandemic and Russia’s invasion of Ukraine. In the past few months, the Federal Reserve has hiked interest rates by more than 400 basis points in its bid to fight inflation.

The aftermath of this is that most countries that have dollar bonds have seen the cost of servicing them surge. As I wrote here, many emerging and frontier markets are going through their worst liquidity crisis on record as the dollar shortage escalates. Countries like Ghana, Kenya, Pakistan, and Sri Lanka are all on the verge of collapsing.

Meanwhile, the decision by the American government to sanction Russia’s central bank and block its foreign reserves sent shockwaves among many countries. The concern is that the US now has the power to sanction any central bank they seem fit.

Is the Chinese yuan the solution?​

Worries of the US dollar dominance explain why central banks bought a record amount of gold in 2022. Most of these purchases happened in countries that are critical of the US like Turkey, China, India, and those in the Middle East.

Now, there is a lingering debate about whether the Chinese yuan can dethrone the US dollar. As we wrote here, one of the biggest forex news of the year was that Russia has turned to the Chinese yuan recently. And as China’s influence grows in the developing and frontier markets, we could start seeing more yuan demand. As seen in this report, many African countries have embraced the yuan.

To dethrone the US dollar, countries need to trust Beijing and its actions. For now, most countries, including allies, have a lot of distrust against Beijing. For example, many countries funded by China lament that the country’s practices are predatory. As a result, protests against Chinese citizens in many developing countries have risen

Most importantly, there are signs that China’s economic growth peaked. For decades, most of China’s economic growth was driven by the real estate sector, an industry that is on life support. Further, the export market that powered the economy seems like it is slowing as countries find for alternatives.

At the same time, the judicial and political systems are not compatible with that of most countries. For people to trust a currency, these are fundamental issues. Therefore, the US dollar will maintain its reserve currency status because of the democratic process in the US, strong judicial system, and the independence of the Federal Reserve.

Crispus Nyaga

Crispus Nyaga is an analyst and consultant with more than 8 years of experience. He started trading Forex while completing his BSc degree and he has worked for brokers like OctaFX, easyMarkets, & Capital. He has also contributed widely in leading websites like rkdream.com, SeekingAlpha, iNvezz, DailyForex, and BanklessTimes. In 2017, Crispus completed his MBA.

@Mista

Seems like this is something Mr Beijing don't want the world to know lol.

 

[beijingwalker]

Yuan doesn't want to replace dollar, dollar is good for China to do the global trade too, what China does is to weaken dollar domination to some extent that dollar can no longer be used as an insurmountable weapon against others in the future, that is doing the world a favor including your Australia.

 

[jhungary]

Yuan doesn't want to replace dollar, dollar is good for China to do the global trade too, what China does is to weaken dollar domination to some extent that dollar can no longer be used as an insurmountable weapon against others in the future, that is doing the world a favor including your Australia.

lol, you don't seems to even understand what yourself are saying.

You can't "weaken" a domination, I mean, what is the point of 59% and 58% or even 51%? It was "Weaken" but then what? The power is still there even at 40%, without another dominant currency that tower over USD, it still dominate because if the US polled its 40% value, it would still hurt. , you are talking about how much US could make in between

Also, you cannot "weaken" the dollar and not have a replacement. And as Nyaga said, you can't really replace it with Yuan, either you let it dangle and keep using USD, or you replace it with Yuan or some other currency, which as I told you and as with this article written by a MBA, said it's impossible.

And finally, if you are saying "replacing USD from being used as a weapon against other" that is just solving one problem and making another one, again, how would you use USD as global trade if USD is not dominant? You can't say "Hey, i don't want it to dominant at a level, but I still want to use it to avoid getting into financial trouble".

LOL

 

[tower9]

Retarded argument and another example of why Americans are clueless about how and why the world is changing.

The yuan doesn’t have to replace the dollar for China to win. Just like China doesn’t need to win over Americas allies to win.

 

[jhungary]

Retarded argument and another example of why Americans are clueless about how and why the world is changing.

The yuan doesn’t have to replace the dollar for China to win. Just like China doesn’t need to win over Americas allies to win.

How then? Please enlighten people here how China could win?

 

[tower9]

How then? Please enlighten people here?

Chinas goal is to cut off Americas capability to magically print money which is the sole reason why America’s gdp is grossly inflated and it can keep passing massive budgets despite deep corruption and zero financial responsibility in Washington. Once the USD declines as reserve currency the empire collapsed.

 

[Super Falcon]

US days of super power and USD dominance days are numbered

Us uses dollar to manipulate world every one is sick with this blackmailing

 

[jhungary]

Chinas goal is to cut off Americas capability to magically print money which is the sole reason why America’s gdp is grossly inflated and it can keep passing massive budgets despite deep corruption and zero financial responsibility in Washington. Once the USD declines as reserve currency the empire collapsed.

You do know barring from an unsurmountable economic set back where world business in recline to a point they don't need currency to deal with trade, whatever you are suggesting the USD to replace is going to replace is going to turn into some other currency that is not USD, it's simply cannot be void, if you don't trade with USD, you will need some other currency..

So which currency you are thinking of they will be going? And also, as I mentioned, unless USD is towered by another currency, even at minority status, at 40 or 41%, it would still carry weight on world reserve market and will impact the market unless some other currency can go over 51 to take that fall and ensure currency integrity, that is before USD can allied with the rest of the west, which you say you don't need to win over for China to win, and once they reach 51% again, it's the same old domination story again..

Otherwise it does nothing, as business will continue, on the other hand, every country have the capability to magically print money as money is fiat, and US only ever did it 4 times since pretty much 1921 outside their cycle, China print more than that in its 75 years of existence. Tell me how China can stop this without replacing the USD in question?

 

[ZeEa5KPul]

At the same time, the judicial and political systems are not compatible with that of most countries. For people to trust a currency, these are fundamental issues. Therefore, the US dollar will maintain its reserve currency status because of the democratic process in the US, strong judicial system, and the independence of the Federal Reserve.

Americans believing this is like a rooster believing its crowing brings up the Sun.

People hold a currency for what it can buy them. As China's technology advances and its markets deepen, more and more people will hold its currency. China's political system also appeals to pretty much the entire world outside the "democratic" West - fast development, effective government, and things get done without interminable stalling.

 

[beijingwalker]

LOL

China herself still has trillions of dollars in reserves now, what's good for China to see dollar collapse overnight? China started to divert dollar reserves to other assets to avoid future potential risks, it's quite a natural thing, unless US, China never seeks world domination, but she also doesn't want to be dominated, no countries want, so what she and some non western countries are doing is to weaken dollar global domination, at least to the point that dollar is no longer a hanging sword over all other countries heads, this is also good for Australia, isn't it?

 

[ZeEa5KPul]

Retarded argument and another example of why Americans are clueless about how and why the world is changing.

The yuan doesn’t have to replace the dollar for China to win. Just like China doesn’t need to win over Americas allies to win.

The American mentality always reminds me of how Gandalf described Sauron:

He is in great fear, not knowing what mighty one may suddenly appear, wielding the Ring, and assailing him with war, seeking to cast him down and take his place. That we should wish to cast him down and have no one in his place is not a thought that occurs to his mind. That we should try to destroy the Ring itself has not yet entered into his darkest dream.

 

[tower9]

You do know barring from an unsurmountable economic set back where world business in recline to a point they don't need currency to deal with trade, whatever you are suggesting the USD to replace is going to replace is going to turn into some other currency that is not USD.

So which currency you are thinking of they will be going? And also, as I mentioned, unless USD is towered by another currency, even at minority status, at 40 or 41%, it would still carry weight on world reserve market and will impact the market unless some other currency can go overr 51 to take that fall.

Otherwise it does nothing, as business will continue, on the other hand, every country have the capability to magically print money as money is fiat, and US only ever did it 4 times since pretty much 1921. Tell me how China can stop this with out replacing the USD in question?

It’s not going to be one currency but many. Basically the USD is going to lose its privileged place. Washington won’t even be able to handle a decline of 20% usage let alone a massive drop like say a 50% decline because the US govt is wholly incompetent in managing a balanced budget and inflation will likely spiral out of control.

 

[Rusty2]

US days of super power and USD dominance days are numbered

Us uses dollar to manipulate world every one is sick with this blackmailing

Been hearing that on PDF Since 2010. Still waiting.

 

[jhungary]

Americans believing this is like a rooster believing its crowing brings up the Sun.

People hold a currency for what it can buy them. As China's technology advances and its markets deepen, more and more people will hold its currency. China's political system also appeals to pretty much the entire world outside the "democratic" West - fast development, effective government, and things get done without interminable stalling.

Sure, everyone like to put money in bank who would regulate your money anytime they like, I am pretty sure of that. LOL

China herself still has trillions of dollars in reserves now, what's good for China to see dollar collapse overnight? China started to divert dollar reserves to other assets to avoid future potential risks, it's quite a natural thing, unless US, China never seeks world domination, but she also doesn't want to be dominated, no countries want, so what she and some non western countries are doing is to weaken dollar global domination

That's not the question I ask, the question I ask is, how you can change that without replacing USD as a dominant currency?

 

[beijingwalker]

That's not the question I ask, the question I ask is, how you can change that without replacing USD as a dominant currency?

How the world was multipolar before US became the sole superpower?