China has begun to pose new challenges to The role of the US dollar in international tradebeginning with the BRICS countries’ plan to create a global reserve currency.
The BRICS group includes Brazil, Russia, India, China and South Africa. Russian President Vladimir Putin said they are all cooperating to create a new currency basket.
At the same time, the People’s Bank of China announced that it is building yuan currency reserves with the Bank for International Settlements, along with 5 other countries.
In its analysis, UBS found that about 85% of central banks have invested or are considering investing in the yuan, although it is still far from the dollar with the highest share of their holdings.
While investors may be concerned about the erosion of the dollar’s dominance, analysts told Insider that the dollar’s demise is unlikely. Nor is it the first time the dollar has faced threats from the yuan.
Meanwhile, China said it would build new yuan reserves along with Hong Kong, Singapore and 3 other countries, each contributing about $2.2 billion.
Beijing hopes that these moves will threaten the dollar’s status as a global reserve currency, used in international trade contracts for oil, but the dollar has seen such challenges before.
In 2016, the yuan joined the basket of currencies that make up the International Monetary Fund’s international reserve assets, known as Special Drawing Rights.
ING’s head of global markets, Chris Turner, said: “This measure was supposed to be the starting point for the yuan as a major international reserve currency…but the adoptions by central banks have been disappointing.”
According to the International Monetary Fund, a quarter of the shift away from the dollar has been to the yuan in recent years.
Instead, central banks have focused on holding unconventional reserve currencies such as the Australian dollar, the Swedish krona and the South Korean won, and the yuan still represents only 2.9% of global reserves.
The yuan is also pegged to the dollar through a reference rate, with China’s central bank maintaining a broad 7-to-1 ratio to make China’s exports more competitive. This means that it is unlikely to threaten its US counterpart as a global reserve asset.
“The BRICS reserve currency is going to be a tough plan,” said Jeff Haley, senior market analyst at OANDA. “4 of the 5 currencies are managed currencies, and in the case of China, the yuan is non-convertible and is managed against a basket of currencies, with the US dollar being the largest by weight. basket”.
In addition, there is the issue of conversion, ie whether there are restrictions on how the currency can be traded in the foreign exchange market. Those who wish to trade large amounts of Indian rupees, for example, must get approval first.
So while investors may be concerned about this apparent new threat to dollar dominance, these factors suggest that the greenback will not face losing its main position anytime soon.
“I hear this story all the time,” Halley said. “There is no threat in the foreseeable future to the dominance of the US dollar. It is the currency of the largest economy used in the largest and deepest capital markets in the world, and it is freely convertible.”