Showing posts with label USD. Show all posts

Saturday, 6 May 2023

Dollar dominance isn't going anywhere. Here are 5 myths about de-dollarization. MUST READ

The dollar's dominance isn't fading anytime soon, and commentators that have warned recently of a de-dollarized global economy are operating on a handful of key misconceptions, experts say.

Jennifer Sor

May 6, 2023, 8:15 PM GMT+8

A 100 yuan banknote (R) is placed next to $100 banknotes in this picture illustration taken in Beijing Nov. 1, 2010.

Reuters/Petar Kujundzic

The dollar's dominance isn't at risk, three currency experts told Insider.
That's because the greenback is an entrenched encumbent and widely trusted as a safe haven.
Economists and currency experts shared five misconceptions about the dollar's position in global markets.

The dollar's dominance isn't fading anytime soon, and commentators that have warned recently of a de-dollarized global economy are operating on a handful of key misconceptions, experts say.

There's been growing talk that the dollar could soon be displaced by a rival currency, both as a reserve currency in central banks around the world, as well as the currency used in an overwhelming percentage of global trade.

Vocal observers, like Tesla CEO Elon Musk, have warned that the threat of de-dollarization is real, as countries like China take measures to supplant the dollar.

But for the most part, those efforts aren't amounting to much, and there's very little chance the dollar will be toppled by a rival anytime soon, three economists told Insider.

They debunked five myths and misconceptions that are commonly touted by dollar doomsayers:

1. Central banks are rapidly shedding the dollar as a reserve currency

The dollar's use as a global reserve currency has actually remained stable from year-to-year, and despite small slides in dollar reserves, the greenback is still by far the largest reserve currency among world central banks.

The US accounted for 54% of foreign exchange reserves in the fourth quarter of 2022, down slightly from 54.8% recorded in the fourth quarter 2021, according to data from the International Monetary Fund. Dollar reserves still dwarf the volume of all other reserve currencies, with the euro accounting for around 19% of reserves, and the Japanese yen accounting for just 5% in the fourth quarter of last year.

That's because the dollar's incumbency is simply very hard to displace, according to Bob Stark, the head of market strategy at Kyriba. Once a currency is recognized as a safe, countries will habitually choose that currency to hold unless there's a seismic economic shift, he added.

"If you're transacting something to millions or billions just as a organization, or if you're looking to park your cash somewhere and want to it to be as resilient as possible, you're probably going to choose the US dollar because it's the least volatile of the currencies. That's that," Stark said.

2. The dollar is losing its stance as the top currency in global trade

This claim also isn't supported by data. Of the 7.5 million currency transactions that occurred daily as April 2022, the US dollar accounted for at least one side in 6.6 million transactions, according to data from the Bank of International Settlements, meaning it has a role in 88% of all global trade.

That number has remained relatively stable for the past several decades — despite concentrated efforts by some nations to shun the dollar's use, Jay Zagorsky, a markets professor at Boston University told Insider.

"For the last 35 years, the dollar share hasn't changed," Zagorsky said. "I think the amount of political rhetoric has heated up tremendously, but people's actions haven't changed."

3. China's yuan is the biggest threat to the dollar

The Chinese yuan has a minor role in the global economy, especially when compared to the greenback. The yuan accounted 2% of all foreign exchange reserves in the fourth quarter of last year, the IMF reported, and nearly a third of that is held by Russia, according to a 2022 IMF paper.

The yuan was also used in one side of just 7% of all foreign exchange transactions last year, BIS said.

China, for its part, has taken efforts to de-dollarize its economy, such as by securing agreements with other countries to transact in yuan, and selling billions of its own currency to Russia. But for the most part, that's had a small effect on the overall dominance of the dollar in global markets, since efforts to de-dollarize are coming from countries with a smaller economy, Zagorsky said.

"Could I see the Chinese taking over from the greater British pound that Great Britain pound? Yes. And I see it maybe potentially taking over Japan. Yes. But it's a pretty far jump to move from China all the way up to beating the euro, beating the US dollar," he added.

4. The dollar could be rivaled by another currency soon

Even with de-dollarization efforts underway, it takes a long time for the dominance of a currency to end – again, because people are looking for a safe place to park their cash.

"Those relationships are only going to move the needle a very small amount," Stark said referring to ties between China and its allies.

Though the percentage of dollar reserves has slipped, he estimates it would take around 24 years for global dollar reserves to drop another 12%. And even in that scenario, the greenback would still outpace reserves of all other currencies.

Perry Mehrling, an economics professor at Boston University, speculates that much of the anti-dollar talk today is spurred from discontent from other countries whose currencies are valued lower than the greenback, not because the dollar is actually at risk of being challenged anytime soon.

He pointed, for instance, to growing de-dollarization efforts after the western nations cut Russia off from the international financial communication system, SWIFT, which sparked fears that the dollar could be weaponized.

"This simmering discontent with being at the bottom of the international hierarchy of money gives [de-dollarization] a focal point," he said. "Mostly, it doesn't do much."

5.The end of dollar dominance would be catastrophic for the US economy and stocks

The dollar being displaced by a rival currency probably wouldn't have much impact on the US economy at all, the economists said.

According to Mehrling, the effects of de-dollarization largely take place on the balance sheets of foreign banks, which are largely disconnected from the US financial ecosystem.

"This isn't directly connected to the pipeline to the United States," he said. "It's not like it can swamp the domestic system."

A drop in the dollar could dissuade foreign institutions from investing in US Treasury bills and Treasury securities, but that would likely just mean the US economy would need to find a difference source of funding, Stark said. In terms of economic growth, he doesn't think it would change very much.

That's contrary to what commentators have implied, with Elon Musk calling the dollar's decline a "serious issue."

"You know, I don't wanna insult Elon Musk," Zagorsky said. "He's into AI, he's into solar power, he is into all these things. He might not be an expert on currency."

https://markets.businessinsider.com/news/currencies/dedollarization-dollar-dominance-currency-war-greenback-china-yuan-economy-2023-5

Friday, 21 April 2023

Larry Summers Says the Dollar Isn’t Losing Its Dominance in Global Economy

Former Treasury chief doubts China’s reserve-currency appeal Summers says US must step up on world stage to secure position

Chris Anstey

April 22, 2023 at 12:40 AM GMT+8

Former Treasury Secretary Lawrence Summers rejected speculation that the dollar is rapidly losing its dominance in the global economy, and highlighted China’s detractions in providing an alternative reserve currency.

“There has never been a country where there was strong a desire to move as much capital out of the country as we’re seeing in China right now,” though capital controls are restraining the outflow, Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “Is that really going to be a place where people are going to decide they want to

sSee

https://www.bloomberg.com/news/articles/2023-04-21/summers-spurns-de-dollarization-hype-flags-china-capital-flight#xj4y7vzkg

Thursday, 13 April 2023

De-dollarization has started, but the odds that China's yuan will take over are 'profoundly unlikely to essentially impossible'

De-dollarization has begun as recent trade deals elevate rivals, but the greenback is likely to remain a global currency, according to economist Peter C. Earle.

Filip De Mott

Thu, April 13, 2023 at 10:09 AM GMT+8·3 min read

De-dollarization has begun as recent trade deals elevate other currencies, Peter Earle wrote.
But the dollar is likely to remain a top global currency, according to the economist.
And the odds that China's yuan will replace the dollar are "essentially impossible," he added.

De-dollarization has begun as recent trade deals elevate rivals, but the greenback is likely to remain a global currency, according to economist Peter C. Earle.

He pointed to last month's deal between China and Brazil to settle trade in each other's currencies, noting that it's the latest example of a growing trend.

Writing in the American Institute for Economic Research last week, Earle added that use of the dollar in "economic warfare" as well as "error-fraught monetary policy regimes" are driving countries away from the greenback.

"And slower or more quickly, the dollar will lose ground abroad," he said.

But in a follow-up post on Tuesday, Earle added that while rivals make gains, the dollar is still likely to remain a global currency.

"First, barring a truly extraordinary event or series of developments, a scenario in which the dollar is no longer used (at all) in international trade is highly unlikely," he said.

He cited the vast size of the US economy and the breadth of its trading relationships, adding that there are high barriers to exit as well as high costs for switching currencies. Such a shift would take decades, if not generations, he said.

Meanwhile, despite China's efforts to elevate the yuan on the world stage and replace the dollar, Earle is highly skeptical.

"Even beyond the decades that such a change would probably take, the likelihood of the yuan becoming the global reserve currency ranges between profoundly unlikely to essentially impossible," he wrote.

Earle's note comes as China has actively established agreements with countries such as Kazakhstan, Pakistan, Laos and Brazil to use the yuan for cross-border transactions, replacing the dollar.

The renminbi has overtaken the dollar as the most used foreign currency in Russia, especially as the country improves its ties with China since being cut off from global finance after its invasion of Ukraine.

But the yuan is poorly suited to become the world's central currency, as it is virtually pegged to the dollar, Earle said. The yuan is only allowed to trade in a 2% range against a midpoint determined daily by China's central bank.

Alongside the fact that Chinese authorities also decide on what capital can flow out of the country, this makes the yuan unreceptive to free market flows.

"These (and a handful of other characteristics) are simply not conducive to establishing a currency that will be used as a unit of account, medium of exchange, and/or basis for settlement in countless international transactions daily," he wrote.

Venture capitalist Chamath Palihapitiya also described de-dollarization concerns as a "nothingburger," and cited similar reasons in arguing that the yuan would not become the dominant currency.

Meanwhile, Carson Group noted that the dollar would be around for a while, pointing to the world's proven trust in it and its prominence in international trade.

Read the original article on Business Insider

https://finance.yahoo.com/news/dollarization-started-odds-chinas-yuan-020938603.html

Monday, 3 April 2023

China's Xi calls for oil trade in yuan at Gulf summit in Riyadh - 10 Dec 2022

Summary

Xi says summit with Gulf, Arab League is 'milestone'
U.S. wary of growing Chinese influence in Arab world
Arabs defy U.S. pressure to limit China ties, cut off Russia
Summits showcase Saudi Crown Prince Mohammed as key leader

December 10, 2022

[2/4] Saudi Crown Prince Mohammed Bin Salman meets Chinese President Xi Jinping in Riyadh, Saudi Arabia December 8, 2022. Bandar Algaloud/Courtesy of Saudi Royal Court/Handout via REUTERS

RIYADH, Dec 9 (Reuters) - President Xi Jinping told Gulf Arab leaders on Friday that China would work to buy oil and gas in yuan, a move that would support Beijing's goal to establish its currency internationally and weaken the U.S. dollar's grip on world trade.

Xi was speaking in Saudi Arabia where Crown Prince Mohammed bin Salman hosted two "milestone" Arab summits with the Chinese leader which showcased the powerful prince's regional heft as he courts partnerships beyond close historic ties with the West.

Top oil exporter Saudi Arabia and economic giant China both sent strong messages during Xi's visit on "non-interference" at a time when Riyadh's relationship with Washington has been tested over human rights, energy policy and Russia.

Any move by Saudi Arabia to ditch the dollar in its oil trade would be a seismic political move, which Riyadh had previously threatened in the face of possible U.S. legislation exposing OPEC members to antitrust lawsuits.

China's growing influence in the Gulf has unnerved the United States. Deepening economic ties were touted during Xi's visit, where he was greeted with pomp and ceremony and on Friday met with Gulf states and attended a wider summit with leaders of Arab League countries spanning the Gulf, Levant and Africa.

At the start of Friday's talks, Prince Mohammed heralded a "historic new phase of relations with China", a sharp contrast with the awkward U.S.-Saudi meetings five months ago when President Joe Biden attended a smaller Arab summit in Riyadh.

Asked about his country's relations with Washington in light of the warmth shown to Xi, Foreign Minister Prince Faisal bin Farhan Al Saud said Saudi Arabia would continue to work with all its partners. "We don't see this as a zero sum game," he said.

"We do not believe in polarisation or in choosing between sides," the prince told a news conference after the talks.

Though Saudi Arabia and China signed several strategic and economic partnership deals, analysts said relations would remain anchored mostly by energy interests, though Chinese firms have made forays into technology and infrastructure sectors.

"Energy concerns will remain front and centre of relations," Robert Mogielnicki, senior resident scholar at the Arab Gulf States Institute in Washington, told Reuters.

[1/4] Saudi Crown Prince Mohammed Bin Salman stands with Chinese President Xi Jinping in Riyadh, Saudi Arabia December 8, 2022. Saudi Press Agency/Handout via REUTERS

"The Chinese and Saudi governments will also be looking to support their national champions and other private sector actors to move forward with trade and investment deals. There will be more cooperation on the tech side of things too, prompting familiar concerns from Washington."

Saudi Arabia agreed a memorandum of understanding with Huawei this week on cloud computing and building high-tech complexes in Saudi cities. The Chinese tech giant has participated in building 5G networks in Gulf states despite U.S. concerns over a possible security risk in using its technology.

NATURAL PARTNERS

Saudi Arabia and its Gulf allies have defied U.S. pressure to limit dealings with China and break with fellow OPEC+ oil producer Russia over its invasion of Ukraine, as they try to navigate a polarised world order with an eye on national economic and security interests.

Riyadh is a top oil supplier to China and the two countries reaffirmed in a joint statement the importance of global market stability and energy collaboration, while striving to boost non-oil trade and enhance cooperation in peaceful nuclear power

Xi said Beijing would continue to import large quantities of oil from Gulf Arab countries and expand imports of liquefied natural gas, adding that their countries were natural partners who would cooperate further in upstream oil and gas development.

China would also "make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade," he said.

Beijing has been lobbying for use of its yuan currency in trade instead of the U.S. dollar.

A Saudi source, speaking before Xi's visit, told Reuters that a decision to sell small amounts of oil in yuan to China could make sense in order to pay Chinese imports directly, but "it is not yet the right time".

Most of Saudi Arabia's assets and reserves are in dollars including more than $120 billion of U.S. Treasuries that Riyadh holds, and the Saudi riyal, like other Gulf currencies, is pegged to the dollar.

Earlier, the Chinese leader said his visit heralded a new era in relations, voicing hope the Arab summits would become "milestone events in the history of China-Arab relations".

China's Xi calls for oil trade in yuan at Gulf summit in Riyadh | Reuters

Friday, 31 March 2023

The dollar isn’t going anywhere MUST READ

Talk of de-dollarisation is divorced from reality

BY RALPH SCHOELLHAMMER

Friday, 31
March 2023

“Nice try, China.” Credit: Getty

The end of the dollar is all the rage. In a piece yesterday for UnHerd, macroeconomic analyst Philip Pilkington argued for the acceleration of the de-dollarisation of international trade based on the recent news that Brazil and China will trade in their own currencies.

There’s one problem: the two countries have announced this arrangement multiple times — in 2009, in 2013 and now again in 2023. If history is any indicator, this is a routine talking point by the Brazilian and Chinese leadership that has so far lacked any substantial financial follow-through. Another example was an LNG trade in yuan between the China National Offshore Oil Corporation (CNOOC) and the French company TotalEnergies. But, as energy expert Anas Alhaji points out, the actual source of the LNG is the United Arab Emirates, which was paid neither in euros nor yuan but in USD, making the French-Chinese transaction symbolic at best.

In similar fashion, the claims that OPEC will de-dollarise have been around since 1975, and while the dollar has lost some ground, there is no alternative in sight. The USD share of the world’s official foreign exchange reserves is 60%; the Yuan’s is 2.76%. The dollar has been around the 60% mark since 1995, and — even more telling — a comparison of data from the Bank for International Settlements compiled by Brent Donnelly shows that since 1989 the USD share in international transactions has been steadily around 90%.

The spectre of a disappearing dollar even made it onto the cover page of the Economist in 2004, but if the last 19 years have shown anything, it is the resilience of the currency. While China certainly enjoys the media frenzy around the allegedly imminent decline of the US (think of it as a kind of diplomatic trolling), it is not clear if it or any other country would be willing to provide the world’s reserve currency even if they could.

Michael Pettis, a senior fellow at the Carnegie Endowment, has pointed out that China’s growth model benefits from the USD’s status as the global reserve currency. Replacing it would require the Chinese Government to give up control of its capital and trade account, while the People’s Bank of China would have to take over from the Federal Reserve.

This would also mean, however, that Chinese financial institutions need the same degree of transparency and global trust as their US counterparts. None of this seems likely, and it is not even clear if China trusts its own currency. A majority of its Belt and Road Initiative projects are funded and denominated in USD, demonstrating the unbroken dominance of Washington in the world of finance.

Another idea floated involves a BRICS+ currency backed by gold or commodities. Yet this assumes a level of political and institutional integration among BRICS member states that simply does not exist. Besides, the idea that India — both a regional & global competitor of China’s — will allow Beijing and Moscow to have a say in its fiscal and monetary policy is at this point political fiction.

For all the troubles of the West, the US and the EU are coherent actors with deeply embedded institutional structures that are difficult to replicate. The costs associated with the introduction of the euro were unequally distributed among member states, but the vision of a common currency as a unifying symbol was seen to be worth the sacrifice. There is no similar shared vision between India, Brazil, China, Iran, Russia, and those other states that would allow for the replication of a common currency. For now, and for some time to come, the dollar is here to stay.

https://unherd.com/thepost/the-dollar-isnt-going-anywhere/

Sunday, 15 May 2022

How the Yuan Could Become a Global Currency

China's Plan to Replace the U.S. Dollar

KIMBERLY AMADEO

Updated May 15, 2022

REVIEWED BY

ROBERT C. KELLY

China wants its currency, the yuan, to replace the U.S. dollar as the world's global currency. That would give it more control over its economy.

As China's economic might grows, it's taking steps to make that happen. Could we see a switch from a greenback- to a redback-dominated world? If so, how and when would that happen? What would be the consequences?

Key Takeaways

Currently the U.S. dollar is the world's global currency, which affords the United States economic and political advantage.
Before the yuan can become a global currency, it must first become a reserve currency held by central banks around the world.
Among the benefits China would enjoy are lower trade costs, greater demand for the yuan worldwide, and less concern about the value of the U.S. dollar in relation to the yuan.

What Must Happen First

China is working hard to make the yuan the next global currency. Although presently a reserve currency, the yuan can’t upstage the U.S. dollar without several important scenarios taking place first, including:

Central banks around the world choose to keep a total of at least $700 billion worth of yuan in foreign exchange reserves
The People's Bank of China (PBOC) allows free trade of the yuan and relaxes its peg to the U.S. dollar
The PBOC becomes straightforward about its future intentions with the yuan
China’s financial markets turn transparent
Chinese monetary policies are perceived as stable
The yuan acquires the U.S. dollar’s reputation of stability, which is backed by the enormity and liquidity of U.S. Treasurys1

How China Benefits from the Yuan as a Reserve Currency

Before the yuan can become a global currency, it must first be successful as a reserve currency. A reserve currency is one that is held in large amounts by governments and institutions as a supplement to national currencies.

Once the yuan is successfully established as a reserve currency, it would give China the following benefits:

More international contracts could be priced in yuan, which would mean China would not have to worry so much about the dollar's value.
All central banks would have to hold yuan as part of their foreign exchange reserves, which would place the yuan in higher demand and lower interest rates for bonds denominated in yuan.
Chinese exporters would have lower borrowing costs.
China would have more economic clout in relation to the United States.
It would support President Jinping's economic reforms.

How the Yuan Is Becoming a Reserve Currency

On Dec. 1, 2015, the International Monetary Fund (IMF) announced that it awarded the yuan status as a reserve currency.2 The IMF added the yuan to its Special Drawing Right basket on Oct. 1, 2016. This basket currently includes the euro, Japanese yen, British pound, and U.S. dollar.3

Why did the IMF make this decision? China’s leaders want to improve the standard of living and increase its economic output. The Chinese have pegged the yuan to the U.S. dollar but via an adjustable peg, or “managed peg.”

This floating peg has generally been on a downward trend since 2015, implying that the yuan has been steadily devaluing against the dollar, thus making Chinese exports relatively more competitive against dollar prices around the world. That allowed China's economic growth to soar thanks to low-cost exports to the United States.4

As a result, China's share of international trade and gross domestic product grew to around 10%.5 This has been a source of trade friction between China and the U.S.

As international trade grew, so did the yuan's popularity. In August 2015, it became the fourth most-used currency in the world. It rose from 12th position in just three years. It surpassed the Japanese yen, the Canadian dollar, and the Australian dollar.6

Central banks should increase their foreign exchange reserves of yuan to provide funds for that level of trade. Central banks alone should purchase about $700 billion worth of yuan. But banks never purchased all the euros they should have, even when the European Union was the world's largest economy. Most international transactions are still done in U.S. dollars, even though its trade has dropped.1

The IMF requires China to liberalize its capital markets.3 It should allow the yuan to be freely traded on foreign exchange markets. That allows central banks to hold it as a reserve currency. For that to happen, China's central bank must relax the yuan's peg to the dollar.

China must have clearer communications about its future actions regarding the yuan. That's what the Federal Reserve does for the dollar at each of its eight Federal Open Market Committee (FOMC) meetings.7

In August 2015, the PBOC relaxed the yuan to dollar conversion rate.8

Instead of a fixed exchange rate, the PBOC would set the yuan's value to its closing value on the previous day. Instead of rising, as many expected, the yuan fell 3% over the next two days.9

The PBOC stabilized the rate. It now has the freedom to allow the yuan to be a stronger tool in monetary policy. The drop also silenced critics of China's reforms, many of whom were members of the U.S. Congress.4

In December 2015, the Bank announced it would begin to shift the dollar peg to a basket of currencies. That basket includes the dollar, euro, yen, and 10 other currencies.10

The Yuan Is Slowly Being Traded in Foreign Markets

Chinese leaders are beginning to make it easier to trade the yuan in foreign exchange markets. To do this risks more open financial and political systems. On March 23, 2015, China backed the Renminbi Trading Hub for the Americas. The renminbi is the name of China's currency system (yuan is the name of each individual unit of currency). That makes it easier for North American companies to conduct yuan transactions in Canadian banks. China opened up similar trading hubs in Singapore and London.11

Former New York City Mayor Michael Bloomberg is Chair of the Working Group on U.S. RMB Trading and Clearing. It is creating a renminbi trading center in the United States. The group includes former U.S. Treasury Secretaries Hank Paulson and Timothy Geithner. Such a center would lower costs for U.S. companies trading with China. It would also allow U.S. financial companies to offer yuan-denominated hedges and other derivatives.12

On June 8, 2016, China granted the United States a quota of 250 billion yuan, the equivalent of $38 billion, under China's Renminbi Qualified Foreign Institutional Investor program.1314

Can the Yuan Replace the Dollar?

The level of trade is not the only reason the U.S. dollar is the world's reserve currency. The strength of the U.S. economy instills trust. Most important are the transparency of U.S. financial markets and the stability of its monetary policy.

On the other hand, Stuart Oakley, managing director of Nomura, pointed out in a 2013 article that China owns $4 trillion to $5 trillion of unallocated central bank reserves and these could be in yuan. As more bilateral swap lines are set up and China moves further down its path of capital market liberalization, central banks' appetite to own this currency will grow.1

Could China's ambition to make the yuan the world's currency lead to a dollar collapse? Probably not. Instead, it will be a long, slow process that results in a dollar decline, not a collapse.

https://www.thebalance.com/yuan-reserve-currency-to-global-currency-3970465

Kimberly Amadeo

EXPERTISE

U.S. and world economies

CURRENTLY

President, World Money Watch

EDUCATION

MIT Sloan School of Management

Highlights

Over 20 years of senior-level corporate experience in economic analysis and business strategy
Has a master's in management from the Sloan School of Business at MIT
Expert on U.S. and world economies

Experience

Kimberly Amadeo is president of World Money Watch, where she shares her expertise on U.S. and world economies, as well as investing. The company produces publications about the global economy that are easy to understand, succinct, and full of practical information. Examples include "The Ultimate Obamacare Handbook" published in 2015, and "Beyond the Great Recession" published in 2010.

Prior to reaching a milestone of 20 years of experience in economic analysis and business strategy, Kimberly received her master's in business administration from MIT's Sloan School of Management.

Kimberly has been featured as an expert on the PBS program "To the Contrary" discussing unemployment, as well as Varney & Co., a news talk show on the Fox Business Network, NBC News, and CCTV America. Other features where Kimberly can be heard discussing the state of the economy include U.S. News and World Report, The Dallas Morning News, Forbes, Industry Week, and the Washington Post.

Education

Amadeo has a master's in business administration from MIT's Sloan School of Management

Latest From Kimberly Amadeo

https://www.thebalance.com/kimberly-amadeo-3305455

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