**The Diminishing Dominance of the Dollar: Is the Chinese Yuan Taking Over?**
A Top Economist Warns of a Shift in Power
According to Paul Gruenwald, the Chief Economist at S&P Global Ratings, the power of the US dollar is beginning to decline. In a recent event in London, he cautioned that the dollar doesn’t hold the same influence it once did. Gruenwald noted that there is now “fragmentation around the edges” of the globally dominant currency, with significant developments happening outside of the dollar world.
The Rise of the Chinese Yuan
One of the key pieces of evidence that Gruenwald pointed out is the increasing number of transactions conducted in Chinese yuan. In March, for the first time, the yuan surpassed the dollar as the most widely-used currency for cross-border transactions in China. Gruenwald also highlighted the growing role of Chinese financial institutions like the Asia Infrastructure Investment Bank and the New Development Bank, formerly known as the BRICs bank, in global lending. All these factors are pushing the Chinese yuan to the forefront of the global economy.
Challenges from Russia
Another major factor contributing to the weakening of the dollar is Russia. Due to economic sanctions imposed on the country following its invasion of Ukraine, Russia has turned to the yuan as an alternative currency. Since February, most trading volumes on the Moscow Exchange have been conducted in yuan instead of dollars. The increasing political ties between Russia and China further support the rise of the Chinese currency.
Echoes of Concern
Gruenwald is not the only economist expressing concern about the future dominance of the dollar. Nobel Laureate and economist Paul Krugman recently wrote in the New York Times that the greenback’s dominance is not guaranteed forever. However, he dismissed the notion that de-dollarization, the reduction of the dollar’s dominance in global trade and finance, is imminent. He believes that although the dollar currently dominates due to a lack of good alternatives, things can change over time.
The Continuing Dominance of the Dollar
Despite the concerns raised, recent data from the Federal Reserve demonstrates that the dollar still remains the dominant currency. From 1999 to 2019, the dollar represented 96 percent of trade invoicing in the Americas, 74 percent in the Asia-Pacific region, and 79 percent in the rest of the world. The report also notes that while the international usage of the Chinese yuan has increased over the past two decades, it still lags behind the Japanese yen and British pound.
Weaponization of the Dollar
The weaponization of the dollar is one of the factors against its continued dominance. The sanctions imposed on Russia, such as freezing half of its reserves and restricting access to the SWIFT transaction portal, have led to concerns about the long-term impact on the dollar’s role as a global currency. Treasury Secretary Janet Yellen acknowledged the risk, stating that financial sanctions linked to the role of the dollar could undermine its hegemony. Elon Musk, CEO of Tesla, also expressed concerns about the weaponization of currency and the potential consequences for its usage.
Search for Alternatives
In light of the challenges posed by the dollar’s weaponization, various countries are exploring alternatives. During a trip to China, Brazilian President Luiz Inacio Lula da Silva questioned why every country should be tied to the dollar for trade. He proposed the idea of having a currency within the BRICS bank to facilitate trade between Brazil and other BRICS countries, eliminating the need to rely on the dollar. This sentiment reflects a growing desire among some nations to export in their own currencies rather than constantly chasing after dollars.
In conclusion, the power of the dollar is showing signs of decline, with the Chinese yuan emerging as a potential rival. Factors such as the increasing number of transactions in yuan, the growing role of Chinese financial institutions, and Russia’s turn to alternative currencies all contribute to the shifting global pecking order. However, the dollar still dominates international trade and finance, and the search for viable alternatives continues. The future landscape of global currencies will undoubtedly be shaped by a complex interplay of various economic and geopolitical forces.