Is the Chinese Yuan Will Replacing the US Dollars as the Main Currency?

Will Chinese Yuan Replacing the US Dollars as the Main Currency ?

Chinese Yuan and US Dollars who will be the main 💱 Currency the next years.

WHY DOLLAR IS A MAIN CURRENCY? 

The U.S dollar was officially crowned the world's reserve currency and was backed by the world's largest gold reserves thanks to the Bretton Woods Agreement. Instead of gold reserves, other countries accumulated reserves of U.S. dollars.

Certainly, here's a more detailed description of why the U.S. dollar is considered a main currency in the global economy:

The United States Dollar, denoted as USD or symbolized by "$," holds a central and predominant position in the global financial system. This status can be attributed to a complex interplay of historical, economic, and geopolitical factors that have solidified its position as the world's primary reserve currency.

 Historical Legacy: The U.S. dollar's ascent to prominence began after World War II with the Bretton Woods Agreement. Under this system, major currencies were pegged to the dollar, which was in turn tied to gold. Although this gold standard was later abandoned, the dollar's role as a key currency endured.

Economic Powerhouse: The United States boasts one of the world's largest and most robust economies. Its GDP is unrivaled, and its economic stability, driven by factors like strong institutions, consumer demand, and innovation, bolsters confidence in the dollar.

Global Reserve Currency: Central banks worldwide hold significant reserves of U.S. dollars as a store of value and a hedge against economic volatility. This provides stability to the currency and reinforces its international acceptance.

Commodity Pricing: Many commodities, including oil, gold, and agricultural products, are priced and traded in U.S. dollars. This makes it imperative for countries engaged in global trade to hold dollar reserves.

Trade Currency: The dollar is the primary currency used in international trade. A vast majority of global transactions are conducted in dollars, simplifying cross-border commerce.

Financial Center: New York City is a global financial hub, home to the New York Stock Exchange (NYSE) and numerous major financial institutions. The dollar is the currency of choice for international financial markets, making it indispensable for global investment and financing.

Political Stability: The United States' political stability and the rule of law inspire trust in the dollar as a safe-haven asset during times of global uncertainty.

Liquidity and Accessibility: The dollar's high liquidity ensures that it can be easily bought, sold, or exchanged for other currencies. This liquidity is attractive to businesses, investors, and governments engaged in global transactions.

 Globalization: As globalization has accelerated, so has the use of the U.S. dollar. Its widespread acceptance and recognition contribute to its status as a main currency.

Network Effect: The more widely a currency is used, the more valuable it becomes. This self-reinforcing cycle has entrenched the dollar's position over time.

Monetary Policy: The Federal Reserve's role as the U.S. central bank allows it to implement policies that influence the value and stability of the dollar, further strengthening its standing.

Financial Innovation: The U.S. has been at the forefront of financial innovation and technology, including the development of digital payment systems. This makes the dollar highly adaptable to modern financial needs.

These multifaceted factors collectively make the U.S. dollar an indispensable currency in international finance and trade, a role it has maintained for decades. However, it's essential to recognize that the global economic landscape is dynamic, and the relative importance of currencies can evolve over time, potentially paving the way for other currencies to assume more significant roles in the future.

The international aspirations of the renminbi are advancing rapidly

In a recent article, Lex aptly argues that the U.S. dollar is poised to maintain its status as the world's dominant currency ("Brics/dollar: reserve preserved," Lex, August 23). Nevertheless, emerging economies have been exploring alternatives. The New Development Bank, also known as the Brics bank, is among the latest institutions diversifying away from the dollar, with approximately 30 percent of its total lending set to be accessible in local currencies by 2026.

It is logical for sizable emerging economies, particularly China, to consider replacing the dollar with their own currencies in bilateral transactions. However, this transition is anticipated to present significant challenges.

As China has embarked on a strategy to internationalize the renminbi, it has recognized the reluctance of non-residents to accept payments in renminbi and, more crucially, to hold renminbi instead of converting them into dollars.Since 2010, this strategy has resulted in approximately 30 percent of China's bilateral trade being settled in renminbi.

 The renminbi has risen to become the fifth most utilized currency in international payments and holds the fifth-largest share of foreign reserves. Its progress has been impressive, yet it still lags significantly behind the dollar. The renminbi's share of international payments, at 2.8 percent, pales in comparison to the dollar's dominance at 42 percent, as does its share of foreign reserves (2.6 percent compared to the dollar's 59 percent).

This disparity highlights that despite being the world's second-largest economy and largest exporter, China does not possess a fully established international currency. To borrow from Nobel Prize winner Robert Mundell, the absence of a "great currency" for China presents vulnerabilities. Furthermore, as noted by Lex, recent sanctions on Russia have underscored the risks associated with holding foreign reserves in dollar-denominated assets, and geopolitical tensions have amplified the costs relative to benefits within the dollar-dominated system.

So, what are the prospects for transitioning to an alternative system? China could establish alternative lending and cross-border payment infrastructure that many developing nations might be inclined to adopt. However, this move could potentially fragment the international monetary system, impede international policy cooperation, and introduce risks to financial stability.