Jan 31, 2024
A mutiny is taking place in the global currency market, with a growing number of countries ditching the U.S. dollar in favor of China’s yuan — at least, that’s the rumor going around.
De-dollarization — when countries shift away from the greenback as the currency for reserves, transactions and to measure value — has become a hot topic in recent years, with countries like China, Russia and others in the BRICS bloc reportedly leading the charge to dethrone the dollar.
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Some are seeking de-dollarization in response to U.S. sanctions and foreign policy plays — for instance, the U.S. trade war with China and the U.S. sanctions enforced after Russia’s invasion of Ukraine — while other nations are simply looking to diversify while the U.S. deals with challenging macroeconomic conditions at home.
Some experts and proponents of cryptocurrencies also see digital assets like Bitcoin eroding the dollar's dominance.
But is China's yuan the most attractive alternative?
“It’s often suggested that countries are stepping away from the U.S. dollar in favor of China’s yuan in a sharp and dramatic shift for the world’s global economy,” said Lucy Ingham, Editor-in-Chief and Head of Content at FXC Intelligence. “This narrative is overstated and doesn’t give a true picture of what is really happening.”
Here’s what FXC Intelligence’s data tells us about the dollar's global hegemony.
‘De-dollarization is happening’
According to data from the IMF, the U.S. dollar accounted for 59.17% of global allocated foreign exchange reserves in the third quarter of 2023 (the latest data set).
Meanwhile, the Chinese yuan — which many think is the biggest threat to the dollar — accounted for just 2.37% of reserves in the same period, with a high proportion of that being held by Russia after the U.S. retaliated to its invasion of Ukraine with heavy sanctions.
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The data shows the greenback’s share of global allocated foreign exchange reserves has fallen by around 6% since early 2016.
During that nearly eight-year period, countries have diversified their foreign reserves with a broad range of currencies — not just the Chinese yuan — including the Canadian and Australian dollars, the Japanese yen and British pound.
“Our research shows that de-dollarization is happening, but that it is not simply a shift to the yuan and that it is by no means rapid,” said Ingham.
“It is instead currently on course to be a slow process over the next couple of decades as countries shift to a broader range of currencies, likely to provide greater hedging from future possible geopolitical shocks.”
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Areas of strength for the yuan
If the yuan continues its current pace of growth (without taking into account potential geopolitical and economic factors that could reshape the world order), FXC Intelligence predicts the Chinese currency will only reach 6% of global reserves by the end of 2034.
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This supports what Treasury Secretary Jannet Yellen said on the matter last year: “The dollar plays the role it does in the world financial system for very good reasons that no other country is able to replicate, including China. We have deep liquid open financial markets, strong rule of law and an absence of capital controls that no country is able to replicate.”
However, there are some areas where the yuan is dominating. For example, the analysts identified a sharp uptick in the use of the yuan for trade to and from China — with the U.S. dollar losing out at around the same rate. In October, Reuters reported that a Chinese national oil company and French energy company completed a yuan-settled liquefied natural gas (LNG) trade through the Shanghai Petroleum and Natural Gas Exchange
The yuan has also enjoyed a growing share of global customer-initiated and institutional Swift payments over the past few years. But the U.S dollar has also seen growth over the same period — debunking the dollar-to-yuan narrative on that front.
How this might impact you
Suffice to say, the FXC and IMF data suggests it would take a very long time for another currency to actually dethrone the dollar, so your long-term purchasing power, savings and investments are likely safe.
If you are concerned about a decline in the power of the greenback, you may want to diversify your investment portfolio.
For instance, investing in gold is a great alternative because unlike the U.S. dollar, which has lost 98% of its purchasing power since 1971, gold’s purchasing power remains more stable over time.
You can get a piece of this glittering action by choosing one of the many gold exchange-traded funds (ETFs) or by opening a Gold IRA — a type of individual retirement account that allows you to invest in gold and other precious metals in physical forms, like coins, instead of stocks, mutual funds and other traditional investments.
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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.
