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Dedollarisation is a process of substituting US dollar as the currency used for (i) trading oil and/ or other commodities (i.e. petrodollar), (ii) buying US dollars for the forex reserves, (iii) bilateral trade agreements, and (iv) dollar-denominated assets.
https://en.wikipedia.org/wiki/Dedollarisation
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The dollar’s dominance as a reserve currency eroded last year at 10 times the pace seen in the past 2 decades
- The US dollar’s reserve currency status has seen gradual erosion for two decades, Eurizon strategists said.
- But last year, the pace of erosion was 10 times faster amid currency sanctions against Russia.
- The dollar’s dominant role in international trade is unlikely to be challenged soon, Eurizon said.
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Editorial by SCMP Editorial
Yuan’s rise will make only a small dent in might of US dollar
The Chinese currency will not be supplanting the greenback any time soon but given the significance of China as the major trading partner to a majority of countries around the world, the yuan, despite its many limitations, will be increasingly important in bilateral trade
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Published: 5:00am, 10 Apr, 2023
Editorial by SCMP Editorial
Yuan’s rise will make only a small dent in might of US dollar
The Chinese currency will not be supplanting the greenback any time soon but given the significance of China as the major trading partner to a majority of countries around the world, the yuan, despite its many limitations, will be increasingly important in bilateral trade
+ FOLLOW
Published: 5:00am, 10 Apr, 2023
The demise of the United States dollar as the world’s leading reserve and trade currency is greatly exaggerated. Its dominant status, unchallenged since the end of the second world war, is unlikely to end any time soon. But there is no denying that changes in the world’s financial architecture and trading patterns are afoot. All these will pose significant challenges to the once-almighty greenback in the years and decades ahead. Following in the footsteps of Russia and Iran, Brazil has reached a yuan-based trade deal with China that will allow its exporters to be paid in the Chinese currency. The payment arrangement will especially facilitate the country’s major exports to China such as iron ore, soybeans and beef. Trade settlement in yuan will increasingly be the norm among the BRICS bloc of Brazil, China, Russia, India and South Africa.
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The so-called de-dollarisation is often explained in geopolitical terms, as those countries facing rising tensions with the US and the West want to seek out alternative payment systems and assets to escape the threat of US sanctions and economic warfare. But much of it is also basic economics. The US dollar has risen by about 15 per cent to a two-decade high against major currencies. All Asian currencies have fallen vis-à-vis the greenback, with the yen dropping by 20 per cent since the start of 2022, while the yuan weakened by 8 per cent. That has made dollar-denominated trade unnecessarily expensive, leading many governments to realise that the use of the greenback is counterproductive under such conditions.
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The yuan will not be supplanting the US dollar any time soon. However, as the current cycle of rate increases continues to buoy the dollar’s value, more countries will be forced to move away from US dollar-denominated trade to look for more economical currencies for settlement. Given the significance of China as the major trading partner to a majority of countries around the world, the yuan, despite its many limitations, will be increasingly important in bilateral trade.
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Why The Dollar Still Beats The Euro And The Yuan – Analysis
By MISES
By Ryan McMaken*
As evidenced by a number of recent policy changes in China, Russia, Saudi Arabia, and Brazil, the status of the US dollar as the world’s reserve currency is under coordinated attack. Efforts to dethrone the dollar, however, will require time and luck in favor of antidollar forces. For now, however, the US dollar is the most preferred currency for foreign reserves and for settling international transactions.
The fact that the dollar is the most popular currency right now is no guarantee it will be so into the medium or long run. No currency remains the reserve currency forever, and the US dollar has only been the world’s reserve currency since the 1930s…
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We can identify some basic conditions that make it a currency desired by banks, investors, and central banks. Here are the most important ones:
- The currency is used frequently in international trade.
- The currency has a high degree of convertibility.
- The domestic economy has large and open financial markets.
- The domestic economy is large.
- Domestic macroeconomic policies are generally stable and allow economic openness.
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In a 2009 study, however, the US Treasury suggested a reason why the US dollar continues to surpass the euro:
The key factor that may explain the smaller share of the euro as a reserve currency is the size and depth of government bond markets. Although total sovereign debt outstanding in the euro area rivals that of the United States, there is no common euro area sovereign debt market. This reduces the ease with which holders of euro-denominated securities can buy and sell them, compared with U.S. Treasury securities.
The US government bond market is huge and allows a great deal of ease in buying and selling Treasurys, which remain extremely liquid and which are considered by many to be near dollar substitutes.
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The Chinese yuan presents another example of why having a large economy on its own isn’t enough for a country’s currency to seize global reserve status. China in recent years has overtaken the US economy in terms of sheer size. Yet the yuan remains in fifth place in terms of global foreign exchange reserves. As of late 2021, the yuan still ranked fourth in terms of its share of international transactions.
Although the yuan is certainly experiencing a high growth in international trade, it still has a lot of ground to cover. Recent deals with Russia, Saudi Arabia, Iran, and an increasing number of states in the developing world will further this trend, but this will only help China meet some of the requirements for becoming a global reserve currency. The size and scope factors are moving in China’s favor, but problems of openness and convertibility remain. China still employs capital controls, meaning its economy is relatively less open than Western ones. Yes, Western states have long used a variety of quasi controls of their own, but we’re still talking about relative openness here. China has only to be relatively less open than its competitors to fail the “reserve currency test.” Moreover, Chinese government debt markets aren’t nearly as liquid or sophisticated as those of the US. The world is in many ways awash in US government bonds—bought with dollars and still considered extremely “safe”—and this is not the case with Chinese debt. Finally, macroeconomic policies in China present a high degree of potential geopolitical risk. China’s track record of not expropriating foreign capital is not well established or reliable. The long covid lockdowns of recent years in China don’t exactly instill confidence either.
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In short, the dollar continues to benefit from the fact that no matter how inflationary it becomes, or how hobbled by regulation the US economy remains, the eurozone and China—not to mention Japan and Britain—present trends that often look at least as bad.
Yet the US insists on shooting itself in the foot. In spite of the dollar’s many economic advantages as a reserve currency, the US regime continues to provide many political reasons for other regimes and economies to abandon the dollar. If the US doubles down on economic sanctions and weaponization of the dollar economy, the dollar’s liquidity and widespread usage may not save it.
About the author: Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him your article submissions for the Mises Wire and Power and Market, but read article guidelines first. Ryan has a bachelor’s degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He was a housing economist for the State of Colorado. He is the author of Breaking Away: The Case of Secession, Radical Decentralization, and Smaller Polities and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.
Source: This article was published by the MISES Institute
https://www.eurasiareview.com/07042023-why-the-dollar-still-beats-the-euro-and-the-yuan-analysis/
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