Much is said that the dollar is in free fall. Will the yuan be the new reference currency? The US dollar has been the dominant currency in international trade for decades, but its hegemony appears to be at risk from the advance of other currencies, especially the Chinese yuan. What factors explain this paradigm shift and what consequences will it have for the world economy?
The yuan, the rising star of the international monetary system, is the official currency of China, the world's second-largest economy and the world's largest exporter and importer. Since 2005, the Chinese government has adopted a policy of gradually easing the exchange rate of the yuan, which was previously pegged to the dollar. This has allowed the yuan to appreciate against the dollar and become a more attractive currency for investors and traders. In addition, China has promoted the internationalization of the yuan by opening offshore financial centers, expanding direct exchange channels with other currencies, issuing yuan-denominated bonds, and including the yuan in the basket of special drawing rights ( SDR) from the IMF.
These measures have promoted the use of the yuan as a reserve, payment and investment currency worldwide. According to the IMF, the yuan represented 2.45% of international reserves at the end of 2020, ranking fifth after the dollar (59%), the euro (21%), the yen (6%) and the pound sterling. (5%). According to SWIFT, the yuan accounted for 2.34% of global payments in February 2021, ranking sixth after the dollar (38%), the euro (37%), the pound sterling (7%), the yen ( 3%) and the Swiss franc (2%).
On the other hand, the US dollar has been the hegemonic currency since the Bretton Woods agreements of 1944, which established a monetary system based on the gold-dollar standard. After the breakdown of the system in 1971, the dollar remained the main reference currency thanks to the agreement between the United States and Saudi Arabia to price oil in dollars. This generated a great demand for dollars by energy-importing countries and consolidated the dollar as the dominant currency in international trade.
However, the dollar has faced several challenges in recent decades, such as competition from the euro, the 2008 global financial crisis, and the Covid-19 pandemic. These events have weakened confidence in the dollar and have caused its value to depreciate against other currencies. According to the Bloomberg Dollar Index, which measures the dollar's performance against a basket of ten currencies, the dollar has lost 12% of its value since March 2020.
In addition, the dollar has suffered the consequences of the expansionary monetary policy of the Federal Reserve (FED), which has injected trillions of dollars into the economy to mitigate the effects of the health crisis. This has raised fears of runaway inflation and a loss of purchasing power for the dollar. Likewise, the dollar has been affected by the US government's deficit fiscal policy, which has increased public debt to record levels.
The United States, for its part, has adopted a critical and confrontational position against the yuan, since it accuses China of manipulating its currency to obtain commercial advantages and weakening the dollar, considering that the yuan is undervalued and that China intervenes in the market. exchange rate to prevent it from appreciating against the dollar. This makes Chinese exports cheaper and more competitive, creating a trade deficit for the United States and affecting its industry and employment. The US government has taken various measures to pressure China to revalue its currency, such as imposing tariffs on its products, sanctioning its companies and declaring China a currency manipulator. However, these actions have failed to change China's monetary policy, but have instead triggered a trade war and an escalation of tensions between the two powers.
China, for its part, defends its monetary sovereignty and rejects the accusations of the United States, arguing that the value of the yuan is determined by the supply and demand of the market, and that its intervention is necessary to maintain financial stability and avoid sharp fluctuations. . China also accuses the United States of weakening the dollar through expansionary monetary policy and high government borrowing, which drives inflation and erodes the dollar's purchasing power.
Unlike the United States, Russia has a pragmatic and flexible position on the yuan, which allows it to take advantage of the economic opportunities offered by China without giving up its geopolitical and strategic interests. Its position on the yuan is one of cooperation and diversification as it seeks to reduce its dependence on the dollar and strengthen its ties with China. Russia has agreed to use the Chinese yuan instead of the US dollar for trade with Asia, Africa and Latin America. This decision responds to a de-dollarization strategy that seeks to avoid US sanctions and create a multipolar monetary system. In addition, Russia has promoted the use of its own currencies or those of third countries to carry out bilateral or multilateral transactions with the BRICS, a group of five emerging countries that includes Brazil, India, China and South Africa. These measures have increased the weight of the yuan and other currencies in Russia's international reserves, which has also increased its purchases of gold.
We must be realistic, the change of the dominant currency in the international monetary system is a historical process that has occurred several times throughout history. For example, the Dutch guilder was the dominant currency in the 17th century, the French franc in the 18th century, the British pound in the 19th century, and the US dollar in the 20th century. This process is usually associated with changes in the geopolitical and economic balance between world powers. Thus, the rise of the yuan reflects the rise of China as an emerging superpower challenging the leadership of the United States. The change of dominant currency also implies changes in the costs and benefits for the countries that use or do not use the dominant currency.
On the one hand, the countries that use the hegemonic currency benefit from greater exchange stability, less financial volatility, less risk of default, and greater access to international credit. However, these countries also lose monetary sovereignty and the ability to adjust to external shocks. On the other hand, countries that do not use the dominant currency face higher transaction costs, greater exposure to exchange rate fluctuations, and greater dependence on the issuing country. However, these countries also retain their monetary autonomy and their room for maneuver in the face of crises.
The conflict between the dollar and the yuan has global implications that affect international trade, central bank reserves, commodity prices and confidence in the financial system. Some analysts predict that the yuan could challenge the dollar as the dominant currency in the future, while others envision a scenario of coexistence or competition between several currencies. We just have to see (if we are not already doing it), how all this war for economic hegemony is reflected in "our pockets."
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