He is currently discussing with Saudi Arabia the use of the yuan for purchases of oil – a commodity whose price, like almost all commodities traded, is in US dollars.
Despite all its efforts, which include the development of a digital currency and a joint venture with SWIFT to develop an international platform for the e-yuan, China’s efforts to internationalize its currency have had only one modest success.
Reports of the impending death of the dollar greatly exaggerate its likelihood and underestimate the obstacles to weaning the world from its dependence on the dollar.
The yuan accounts for only around 2.5% of international financial transactions processed via SWIFT. Its share in foreign exchange reserves is slightly lower.
The greenback is used for about half of world trade, including 74% of trade in the Asia-Pacific region. About 60% of global foreign exchange reserves are held in dollar-denominated assets, and about two-thirds of all global securities issuance is in dollars.
In addition, about a third of the world’s economies peg their currency to the dollar. Although China does not, it uses a basket of currencies from its trading partners in which the United States is, naturally, the dominant currency.
The euro is the second most traded currency in the world, but it accounts for only about 21% of international foreign exchange reserves, only about 5% of foreign countries are pegged to the euro and only 23% of foreign currency debt are issued in euros against 60 percent in dollars.
Europeans have made their own efforts (again encouraged by Donald Trump’s trade wars against everyone else and his contempt for traditional US allies and global institutions) to reduce their dependence on the dollar.
They have tried to promote more trading in euros, especially for trades in commodities traditionally denominated in dollars and for the settlements of trades in bonds, stocks and derivatives.
The problem that Russia, China and even Europe face is that the dominance of the dollar perpetuates its dominance. Network effects and the coincidental dominance they confer on US banks (and their influence on SWIFT) make it difficult to wean from the business.
There are other factors at play.
The United States has the largest, deepest, and most liquid financial markets in the world, especially the world’s largest public debt market. Funding in Europe and most other major markets is primarily through banking channels rather than securitized debt markets.
The size of its economy and financial markets, the relative stability of the currency, the strength of its legal system, and a central bank remote from its politicians are other factors integral to the global acceptance of the dollar.
Europe has some of these same characteristics, but its debt markets are much smaller and its governance, as it includes 27 individual nations, is heavier and more fragmented.
China has not developed debt markets. Its judicial system is not trustworthy. It controls capital flows. Its currency is not floating, but managed.
It opened its markets cautiously but steadily, but, as offshore bondholders learned from the cascade of defaults by Chinese property developers, or equity investors learned from its crackdown on big tech companies, China puts its own interests before those of foreign investors.
The dominance of the dollar has eroded over the past decades as the EU has strengthened its institutions and expanded its membership and China has also chipped away at the dollar’s market position.
Trump has helped and escalated their efforts and he could do so again if he wins another term in the White House and revives a MAGA program hostile to most international commitments, including NATO.
In the long term – decades to come – perhaps the deployment of the dollar’s global influence to impose the sanctions on Russia, and the message that has been sent to China and others, will see its dominance again. scaled down.
It would, however, take significant structural changes to Europe’s financial systems and an unlikely relinquishment of absolute control over its economy and its legal and financial systems by the Chinese Communist Party to create meaningful change.
Cryptocurrencies, often touted as an alternative to the dollar, are too volatile to develop as a viable source of a future reserve currency, although it is conceivable that a digital dollar could supplant physical currency or even , as former Bank of England Governor Mark Carney suggested that a virtual “synthetic hegemonic currency” – a basket of multiple digital currencies – could emerge.
But that’s all in the very long term. Meanwhile, reports of the impending death of the dollar greatly exaggerate its likelihood and underestimate the obstacles to weaning the world from its dependence on the dollar.
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