For several years, we have heard how the US Dollar is losing its dominance in the world, and the Renminbi will be the next big thing in the world of reserve currencies. Yet claims of the US Dollar’s demise is often negated by regular economic data that shows the currency reigning supreme in international finance and trade.
The abiding power of the US Dollar has repeatedly proved itself against other major currencies, and is no doubt highly perplexing and somewhat contentious for the governments of countries such as China, Russia and Iran who would love to see the demise of the dollar, or at least take a back seat in the global reserve currency stakes. The bottom line is that if you take any economy in the world, they cannot compete with the United States capacity to produce liquid and safe assets.
Investing in Renminbi
China has been pushing for some time for other countries to adopt the Renminbi in greater amounts whilst reducing their exposure to the US Dollar. Interestingly last year, 30% of reserve banks expected to increase their holdings of Renminbi whereas this year the figure has fallen to 13%. Experts suggest this is due to geopolitical tensions between China and the US plus US sanctions in Russia.
Data released by a UK based central bank think-tank, the Official Monetary and Financial Institutions Forum (OMFIF), reflects the sentiment whereby a combined total of USD 5 Trillion of assets being managed by reserve banks/central banks expect a gradual decline of the USD Dollar as a proportion of global reserves.
Today the percentage total of that proportion is 58% but the combined wisdom of the reserve banks suggest that total will be 54% in 2033. Data released from the OMFIF shows that 6% of reserve banks will over the next couple of years reduce their USD Dollar exposure while 10% will increase their exposure over the same period, but by 2033 a net 6% of reserve banks advised they expect to have reduced their exposure to the US Dollar.
So, what does this mean right now?
All in all, the US Dollar seems pretty much secure as the world’s main currency reserve with the only impediment to its ongoing dominance being the US Government themselves. This may appear as a fatuous comment, however, let us remember 2007 – 2009 global financial meltdown, and the recent spate of US Banks having to be bailed out, the default on US Treasury Bonds was averted but a domino effect could have destroyed confidence in US obligations.
Also, with the power the dollar brings, the US government should be mindful of being overbearing and complacent. Whilst many sanctions are indeed deserving (e.g., Russia), the unilateral use of the US Dollar as a diplomatic baseball bat could turn allies into adversaries, making it far more difficult for the United States push their values of freedom and financial policing to countries who could easily be turned towards BRICS who are advocating a move away from the US Dollar.