Is 'de-dollarisation' possible?
According to Joost Derks, currency expert at iBanFirst, this will not happen in the next 10-20 years. The first reason is obvious. Most global debts are denominated in USD and to repay them, you need access to US dollars. This is true for all major economic powers, even China, whose first loans under the New Silk Road were even issued in USD to finance the project. Secondly military hegemony and monetary power are strongly linked. The stronger a country's military ties with the US, the more dependent that country is on the US dollar. A study by the Fed shows that 75 per cent of global US dollar reserves are held by countries with strong military ties to the US. Even if the dollar were used less in world trade (which is unlikely, by the way), it would not necessarily mean that the dollar would lose its status as the main international reserve currency (the preferred currency in which governments want to hold some of their assets) precisely because of US military hegemony. Thirdly there are several structural factors that support a dollar-oriented international monetary system (rather than a Chinese yuan-oriented one).
Let's zoom in on those structural factors:
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While the dollar is extremely liquid, the yuan is not.
Let's dive into the facts for a moment. As for interest rate derivatives trading, in China's yuan every day traded for USD 30 billion. The USD only does 20 minutes over to reach that volume. China's RMB would take 77 years to trade as much as the USD in one year.
We can also look at FX trading in each country, in each currency. In 2022, China trades as much FX as the US did in 1992 - so it is 30 years behind (and probably more, as this is in nominal dollars). Even if we add Hong Kong, it will be decades before the USD loses its currency dominance.
- The yuan is pegged to the dollar.
The Chinese government sets the yuan's range against the dollar on a daily basis, thereby steering the yuan's exchange rate. So the exchange rate is set by the government and not the free market.
- Militarily and economically, the United States remains the most powerful country in the world.
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The US is also the world's largest oil producer.
What might the international monetary system look like in 10 years?
We are probably stepping into a more decentralised global monetary system in which the US dollar will remain the main reserve currency alongside many other competitors, such as the yuan and the euro. This is a healthy and normal development for the global economy, but especially for the US economy. The fact that so many countries depend on the currency of just one other country is not good. It creates imbalances, both for them and for the United States. However, there is one final point that the strong dollar trend could reverse. We know that the hegemony of the dollar increases US import power, after all, a strong currency makes imports relatively cheaper. But that also has a downside and is detrimental to the competitive position of US companies and thus depresses their export volume at the expense of overall domestic industrial capacity. In short, the global diversification of central bank reserves and money flows is bad for 'USA the Empire', but not bad for 'USA the Country'.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
