The world could soon see the dominance of the US dollar start to wane, amounting to a partial de-dollarization of the global economy, according to JPMorgan, but that doesn't mean it's at risk of being replaced by a competitor like the yuan.
In a recent note, strategists at the bank explained that even if China's economy surpasses that of the US, it is still unlikely that the hegemony of the greenback would take much of a hit, and history suggests that any shift would happen at a glacial pace.
"While the US surpassed Great Britain as the world's largest economy in the latter part of the 19th century, the US dollar is commonly perceived to have overtaken the British pound as the world's foremost reserve currency only by the end of WWII," JPMorgan strategists wrote.
"Historical experience thus suggests that if China were to overtake the US as the world's largest economy around 2030, dollar dominance may persist even into the second half of the 21st century." READ MORE...
For many weeks, speculation has been circulating about the decline of the dollar, the currency of world trade since the end of the Second World War.
The U.S. dollar is in decline -- or at least such is the speculation that has been circulating this year.
These rumors are fed by various articles, starting with headlines saying that Russia is now considering using China's yuan for its global trade. Then talk followed that Saudi Arabia, a major U.S. ally, was considering charging in yuan for its oil exports to China.
Things accelerated: France was reportedly considering buying gas from China with yuan, while Brazil and Beijing were considering no longer using the U.S. dollar in their bilateral trade relations.
The avalanche of rumors about the demise of the U.S. dollar was such that some headlines said that the Brics countries -- an acronym for Brazil, Russia, India, China, and South Africa -- were considering developing a new reserve currency, while India was in the process of settling some trades in rupees.
All this news had a common theme: The dedollarization of the world economic stage was under way.
The greenback had lost or was in the process of losing its place as the top choice in world trade and finance, this theme suggested. It was circulating mostly among conservatives and critics of the policies of President Joe Biden's administration. The death of the U.S. dollar on the global stage was inevitable, they predicted.
The Dedollarization Narrative
This narrative is based primarily on the fact that in the aftermath of World War II, the U.S. gross domestic product accounted for almost half the world's GDP, a situation that placed the U.S. dollar as the main currency of global exchange, store of value and unit of accounting.
But the U.S. economy is no longer as dominant as it was, these critics say, so the reign of the U.S. dollar is also nearing the end.
For Elon Musk, Tesla's (TSLA) - Get Free Report CEO and, in his view, the global CEO, dedollarization is inevitable and the result of the U.S. using the currency as a weapon on the world stage.
One way the greenback is weaponized is the economic sanctions the U.S. imposes on other countries. Consequently, the billionaire entrepreneur says, other countries at some point will no longer want to use the U.S. dollar, to free themselves from dependence on America and its diktats. READ MORE...
Last week, China and Brazil reached an agreement to settle trades in one anothers’ currencies. Over the past 15 years, China has replaced the United States as the main trading partner of resource-rich Brazil, and as such that shift may have been inevitable. But within the context of recent circumstances, this appears to be another in a series of recent blows to the central role of the dollar in global trade.
As the world’s reserve currency, the US dollar is essentially the default currency in international trade and a global unit of account. Because of that, every central bank, Treasury/exchequer, and major firm on Earth keeps a large portion of their foreign exchange holdings in US dollars. And because holders of dollars seek returns on those balances, the ubiquity of dollars drives a substantial portion of the demand for US government bonds in world financial markets.
The switch from dollars to a yuan-real settlement basis in Chinese-Brazilian trade is only the latest in a growing trend. Discussions of a more politically neutral reserve currency have gone on for decades. The profound economic disruption experienced by Iran, and more recently Russia, after being evicted from dollar-based trading systems like SWIFT, however, have led many nations to consider imminent contingency plans. India and Malaysia, for example, have recently begun using the Indian Rupee to settle certain trades, and there have been perennial warnings about Saudi Arabia and other energy exporters moving away from the dollar. On that note, China also recently executed a test trade for natural gas with France settled in yuan. READ MORE...
This week Brazil and China (above) reached a deal to trade using their own currencies rather than the US dollar. The Chinese are fulfilling their vow from February to open up a clearing house to settle yuan-denominated trades in Brazil, having previously announced similar clearing houses in Pakistan, Kazakhstan, and Laos.
In many ways, this development is inevitable. As of 2021, China accounts for 31.3% of Brazilian exports and 22.8% of their imports, the most of any country. The United States comes a distant second, accounting for only 11.2% of Brazilian exports and 17.7% of imports.
China has been Brazil’s largest trade partner for fourteen years. At a certain point, both parties were going to raise the question of why their trade should use a third party currency.
The same day that the Brazilian trade deal was announced, another major story hit global currency markets: China settled its first LNG trade in yuan. This development alone would be important enough to bear scrutiny given that much-vaunted status of the US dollar as an energy currency — the ‘petrodollar’ — but reading beyond the headlines reveals something even more surprising.
The trade was not settled with an energy company in some far-off Middle Eastern country, but instead with TotalEnergies, the French supermajor. With revenues of over $182bn and more than 100,000 employees, TotalEnergies is by far the largest company in France.
This energy deal suggests that ‘yuanisation’ will not be confined to the global periphery. Until recently, suggestions that the BRICS+ countries would dump the dollar and move to new currencies was met with derision. The Brazilian trade deal puts that scepticism firmly to bed.
But it now appears that the yuan is making inroads into Europe. While the speed of this change is shocking even to those of us paying attention, these developments were presaged by German Chancellor Olaf Scholz’s controversial visit to Beijing last November. READ MORE...
