Yuan for dreamers: Talk of dollar’s demise exaggerated

Speculation has grown that similar turbulence could even reach the biggest economy of them all – the United States – running alongside talk of the de-dollarisation of the global financial system, or at least the rise in alternatives to the dollar as the world's reserve currency.

Read more: Is the petrodollar losing its lustre?

The potential for other currencies to act as the base for global exchange and investment is a hot topic in world financial centres, with plenty of analysis on the topic from eminent experts.

There has been much talk of the dollar's weaknesses on social media, with some claiming that its loss of status could lead to a wider collapse in value.

Big talk, even bigger questions

Much has been made of other assets that could be a safter, amid doubts about the tendency of the US to print dollars when it feels the need. Real estate, gold and newly digitally minted crypto currencies have all been touted as potential safer bets, in the event of any dollar collapse.

Most of these markets have witnessed much of their own destruction of wealth, as bubbles in them have burst, while all the while the dollar has kept relatively stable.

Some articles in respected international newspapers are both alarming and surprising, at a time when the US currency controls more than 80% of global trade and about 45% of deposits, according to the US Federal Reserve.

What will be the fate of these transactions and most of the dollar-denominated investments of sovereign funds in stocks and bonds?

What about the trade in oil and commodity contracts on global exchanges? What financial earthquake will strike the world if the dollar really does ever lose its role?

Precious mettle

The dollar's lack of any supply constraint, such as the gold standard that pegged its value to the precious metal, is the basis of the theory that it will one day lose its dominant role outside the borders of the US.

Some see that as inevitable, especially as viable alternatives arise. 

But it's useful to remember that the greenback derives its strength from the weight of the United States – the great power that is rooted in democracy, freedoms, the rule of law, free economy, human rights, regulatory bodies, transparency, and established assets that govern its economy and financial markets internally and externally.

All of this constitutes a different kind of gold standard, one that has nothing to do with metal, but more to do with investors' mettle.

Confidence comes from these important concepts that stand behind the dollar and support the global system. They are among the reasons world central banks resort as a store of value and the main constituent of national reserves.

These soft powers look unwieldy to other great nations testing US dominance, China foremost among them. The most prominent rival to the US is seeking an end to that unipolar dominance and its rise must be taken into consideration.

China may be able to become a political, industrial, technological, and commercial world player – it's doing very well in these terms – but when it comes to currency and the exchange system, it's another story, although one that begins with some promising characteristics.

China is on manoeuvres

As it mulls its international ambitions, China is already financially active. It is laying the foundation for a new universally accepted alternative to the existing Swift interbank messaging system, which currently underpins the global transaction network among banks.

It is, in tandem, seeking to expand the emerging market group known as the Brics: Brazil, Russia India China and South Africa.

This new bloc has made great strides toward setting up a shared currency, similar to the European Union's euro, meaning there could one day be two established international currencies to act as potential dollar rivals.

So far so, promising for Beijing and worrying for Washington.

And yet, China remains ill-prepared to catch any imbalance in global financial and commodity markets – the most important of which is the oil market – due to its modest legislative structure and incomplete confidence in its financial systems, which are marred by capital controls, freedom of transfer restrictions, and one-ruling party governance, unlike US markets. 

All that acts as a powerful deterrent for international  investors –  and global central banks – who want to be assured of the availability of their money and the ease of withdrawing and transferring it immediately when needed, especially in times of difficulty.

Would they have confidence in China allowing that in a time of crisis?

And so, we arrive at the central question amid all this talk of the dollar's decline, loss of status and potential demise: what is the real, viable alternative?

Dollar worries abound, but it's worse everywhere else

That said, the US is no stranger to worrying global markets. It has had runaway inflation of its own, fought back by the Federal Reserve with a long run of rate hikes.

And now it is once again playing political brinkmanship with the debt ceiling – the self-imposed government limit on government borrowing that could, in theory, lead to a default on US Treasury bonds.

The latest debt ceiling needs to be lifted by the start of June to avoid holders of US government debt not getting paid for the first time ever.

Even with the occasional Capitol Hill clash over that, the US still enjoys relative political, economic, and demographic stability compared to both Europe and China.

Although the dollar has weakened over the past six months, it remains close to its highest level in a decade against the currencies of Washington's trading partners.

The greenback "has maintained its record strength against G10 and emerging market currencies," said Robin Brooks, chief economist at the Institute of International Finance.

Demand for US Treasuries has maintained steady growth since 2013, according to Bloomberg, and the US has seen the largest influx of foreign direct investment and long-term investment in business and property, compared to other major economies in 2022 due to the resilience of its economy. 

The dollar has a special place in the global financial system – it is the strongest global reserve currency – making it the safest, with many countries and banks holding the dollar as a reserve in their coffers or using it as a major currency to support their currencies and economies.

That has been true since the Bretton Woods Agreement established the modern monetary system in 1944, as World War II was ending.

Read more: Why the world needs a more just and inclusive monetary system 

Most global financial contracts are written in dollars as one of the main conditions for confidence and fulfilment.

The US economy is the strongest on the planet with a gross domestic product of more than $23 trillion – about $6 trillion ahead of China's, and a quarter of the global economy.

China still owns about $1 trillion of US assets, in addition to being the third largest trading partner of the US after Mexico and Canada.

The volume of US exports to China amounting to $1.8 trillion, representing 8.6% of total US exports in 2021, while the volume of US imports from China amounts to $2.8 trillion, representing 17.9% of US imports, according to the US Department of Commerce.

This puts China's interests in challenging the US and its currency into question – it could amount to pure economic stupidity.

Yuan more rival – but what weight does it have?

Some countries resent the United States using the dollar as a weapon to punish "rogue states" or states waging wars against their neighbours, such as Russia.

They worry about the unilateralism of the most powerful international currency and have taken symbolic steps such as reducing their transactions in dollars and replacing the greenback with other currencies, local or international, or reducing their central banks' dollar reserves.

We have seen the dollar's share of these reserves decline globally from about 70% some 20 years ago to less than 60% now.

China has asked oil producers to agree to make their payments in yuan instead of dollars and has concluded Swift agreements with a number of countries, allowing it to surpass the US dollar in its business transactions.

Indeed, these requests have been positively met in Russia, France, Brazil, Egypt, Iran, and others, depending on the political and economic conditions of each of these countries.

But the most important thing is to assess the size of these transactions and their actual impact on the dollar's dominance and the ability of these moves away from it to attract other countries with balanced economies to follow the same trend. 

We must remember here that America didn't punish innocent or oppressed people with the dollar as a weapon.

It did so only to the corrupt –  smugglers, aggressors, criminals, and dictatorial and bloody leaders – regimes who take power by force of arms, perpetrate massacres, and cause tragedies for their own people and other nations.

Dollar keeps on keeping on

The International Monetary Fund estimates that global trade in oil, gold, cars, smartphones, and other commodities traded in dollars is about 60% of the total; the euro accounts for about 30%, while the remaining 10% is covered by all other currencies, including China's renminbi – or people's currency – also known as the yuan.

Given that 75% of US debt is domestic, the impact of the demand of dollar asset holders around the world to liquidate their large investments won't dissuade the country from securing its liabilities by selling some of its important assets, including treasuries, securities, or others.

It may well be that the dollar weakens at some point. Especially if the dangerous if the tug-of-war between Democrats and Republicans over the federal debt ceiling worsens next month. But all this talk of the dollar's collapse or loss of its role as the world's most powerful currency is too early.

Read more: How a $31.45 trillion US fiscal earthquake could shake the world

Nothing is impossible in the world of money and economics; a trend towards a multipolar world of currencies may emerge in the long term, but the transition away from dominance of the dollar has been long mentioned and still has a very long way to go.

Decades ago, the emerging reserve currency was Japan's yen. Around 23 years ago it was the euro. The yuan is just the most recent in a line of rivals, as the anti-dollar dreamers keep talking, while the US currency keeps on keeping on.