Newsletters
Home Economy
Huileng Tan
2023-05-18T07:12:02Z
- Amid the de-dollarization debate, countries are lining up backup reserve currencies for trade and payments.
- Sanctions against Russia sound a cautionary tale over the power Washington — and the USD — wields.
- The Chinese yuan, gold, Bitcoin, the euro, and a common BRICS currency aim to chip away at USD supremacy.
The dollar isn't going away, but other assets classes are slowly chipping away at its dominance.
The US dollar has been the world'sreserve currencysince the second world war, playing a crucial role in the world's trade.
But countries globally are now lining up backup currencies for trade, as sanctions against Russia over its invasion of Ukraine have led tosome prominent world leaders and business figuressounding a warning over the power Washington — and the US dollar — wields.
Sanctioned countries like Russia and emerging nations like Argentina have recently startedusing the Chinese yuan for trade, primarily with China.
Even so, there's no indication the dollar's dominance could fade in the foreseeable future,simply because the currency is such an integral part of the world economy,Insider's Jennifer Sor reported on May 6.
The dollar is by far the world's most dominant reserve currency — meaning a large quantity of a foreign currency held by central banks and major financial institutes for their use from investments to payments.
In 1999, over 70% of the world's foreign exchange reserves were held in the US dollar.
But that percentage has been dropping — the dollar's share in global foreign exchange reserves fell to under 60% in the fourth quarter of 2021, theInternational Monetary Fund, or IMF,said in aJune 2022 blog post.
And despite accounting for the lion's share, or 54%, of global foreign exchange reserves in the fourth quarter of 2022, there has been a decline in the dollar's share of the total foreign reserve pie, per IMF data.
But this doesn't mean America's strategic competitors — like China — wouldn't stop challenging American hegemony. Even alternative currencies like the Swedish krona, the South Korean won, and the Australian and Canadian dollars have beenchipping away at the greenback's share.
Read further for five assets that are trying to topple the dollar's dominance.
1. Beijing has big ambitions for the Chinese yuan.
The most high-profile contender to the US dollar is the Chinese yuan — Beijing has been trying to grow international adoption of its currency for years.
In the past year,China's been payingfor almost all of its Russian oil imports in its own currency to counter-sanctions against Moscow over the Ukraine war.
"It's clear from the moves China is making, like paying for almost all Russian oil imports in yuan or working with Brazil for yuan-denominated trade, that China does not want its currency to remain domestic," Abishur Prakash, theheadof The Geopolitical Business, a Toronto-based advisory firm, told Insider.
After all, having control of a currency the entire world needs amplifies a nation's power, he added.
However, the current discussion surrounding the yuan as a key reserve currency is more about geopolitical tensions and China's economic might than the yuan's actual utility as a reserve currency, Rory Green, the chief China economist at London-based consultancy TS Lombard, wrote in an April 28 note seen by Insider.
"It is important to differentiate between increased international usage of RMB and de-dollarization," Green added. He was referring to the yuan by its official name, the renminbi, or RMB.
Quite simply, the yuan is bound by restrictions – mostly because its value is still managed by Beijing.
In March 2023, the yuan accounted for just 2.3% of global payments via SWIFT, the global financial messaging system used by banks. In contrast, nearly 42% of all payments were made in the US dollar.
2. Gold is making a comeback as a store of value.
Central banks have been snapping up gold — a traditional store of value — amid the global debate over de-dollarization.
"This geopolitical turmoil is not going away,"Karen Karniol-Tambour, the co-CIO of investment management company Bridgewater Associates, said at a conference last Tuesday.
There's "a slow-moving secular support for gold," she said, per Kitco News.
A plunge in the value of some emerging market currencies — such as the Argentine peso — has also spurred these countries to look at alternative assets for their reserves, such as gold.
Just this month, thecentral bank of Zimbabweadopted gold to back the first sale of its digital currency, the digital Zimbabwe dollar. The country wants to ease the demand for the greenback following a plunge in its local fiat currency, which was unpegged from the US dollar in 2019.
"The oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar," Ruchir Sharma, chair of Rockefeller International, wrote in The Financial Timeslast month.
In the first quarter of 2023, central banks snapped up 228.4 tons of gold that were added to global reserves — a 176% increase from a year ago, per the World Gold Council, an industry organization.
That's on the back of a year of record gold buying by central banks in 2022 as the institutions snapped up 1,136 tons of the yellow metal, the council wrote in aFebruary 2023 report.
3. Digital currencies and crypto are eyeing a slice of the USD pie.
Digital currencies, including cryptocurrencies like Bitcoin, are yet another asset class that's vying for the dollar's position.
China's yuan has been issued in a digital format, which had sparked a de-dollarization debate even back in 2021when it was still undergoing public testing.
The digital yuan "is a key component of an alternative to the dollar-based order that Beijing is building," Diana Choyleva, the chief economist at Enodo Economics, told Nikkei in August 2021.
Other than geopolitical rivalry, settling cross-border payments in the digital yuan could also be cheaper and easier than a dollar-based system — boosting its usage internationally, Choyleva told the media outlet.
The digital yuan is being rolled out gradually in China, with the eastern city of Changshu starting to pay public employees in the currency recently.
Even Zimbabwe launched its digital Zimbabwe dollar just this month, backed by gold.
Meanwhile, emerging nationsEl Salvador and Central African Republic have adopted Bitcoin as an official currency. El Salvador even added Bitcoin to its national reserves.
"If this trend takes hold, it can lead to a redistribution of leverage power away from the largest states and their ability to expand their balance sheets at will," wrote Andy Yee, an industry associate at the University College London Centre for Blockchain Technologies, on the University of Hong Kong's Asia Global Institute website on May 11.
4. The euro is already the world's second most commonly held reserve currency.
While the European Union and the US are allies, it hasn't stopped the European Commission's ambition to boost the euro's use in international payments and challenge the greenback.
This is evident from a proposal in 2018 to boost the role of the euro after former US President Donald Trump withdrew the US from the Iran nuclear deal unilaterally.
The bloc's aggressive stance has eased since then, but recent comments from major EU economies point to the bloc's tensions and rivalry with its most important ally.
President Emmanuel Macron of France warned against the "extraterritoriality of the US dollar," suggesting in an April interview with Politicothat Europe should cut its dependence on the greenback.
But the euro is far from overtaking the dollar as the world's reserve currency.
The single currency accounts for 20% of global foreign exchange and international debt — a far second to the greenback's share of the pie,according to the European Central Bank.
Still, "no other currency has the recognizability, stability and economic might behind it," South Africa-based money manager Vestact said in a note to clients, per Bloomberg on May 10. "The only currency that is vaguely close to being able to replace the dollar is the euro."
5. The emerging BRICS nations are eyeing a common currency.
A group of emerging countries comprising Brazil, Russia, India, China, and South Africa called "BRICS" has also pushed for a common currency.
While the idea was floated byRussian President Vladimir Putinas early as June 2022, the concept started gaining traction again recently amid the debate over de-dollarization.
"Why can't we do trade based on our own currencies?" Brazil President Luiz Inácio Lula da Silva said during an April state visit to China, per The Financial Times.
"Who was it that decided that the dollar was the currency after the disappearance of the gold standard?" he added.
The BRICS group will discuss the common currency "properly" at an August meeting of the bloc's leaders in Johannesburg, Naledi Pando, South Africa's international relations and cooperation ministertold Bloomberg in an interview on May 9.
It isn't quite clear what the BRICs nations envision for their common currency, but it could be a rival to the US-dominated IMF's Special Drawing Rights, or SDR, which is an international reserve asset based on a basket of five currencies: the US dollar, the euro, the Chinese yuan, the Japanese yen, and the British pound sterling, per the IMF.
A common BRICS currency would help boost the geopolitical clout of the group of major emerging nations.
"Why would the BRICS countries need an SDR-like basket currency? One can only think this is a move to address the perceived US-hegemony of the IMF and will allow BRICS to build their own sphere of influence and unit of currency within that sphere," Chris Turner, the global markets head at Dutch bank ING wrote in a June 2022 note.
Get the latest Gold price here.
Check out: Personal Finance Insider's picks for best cryptocurrency exchanges
Read next
More...
FAQs
Will the yuan replace the dollar? ›
But the dollar is likely to remain a top global currency, according to the economist. And the odds that China's yuan will replace the dollar are "essentially impossible," he added.
What happens if the dollar is replaced? ›No matter the world reserve currency, you'll still owe your mortgage, credit card, car, and college tuition. The big difference is that those dollars will now be worth mere pennies. It will be two, three, or even ten times as hard to pay for anything, including food, water, shelter, etc.
What happens if the dollar stop being the reserve currency? ›Underlying all of it is the presumption that without its “exorbitant privilege” of reserve currency status, the dollar will sink, US interest rates will soar and market mayhem will ensue.
What happens if the U.S. dollar collapses? ›(1) the cost to import goods will skyrocket because foreign companies will no longer want dollars; (2) our government will lose its ability to borrow at its current levels – forcing it to raise taxes or print money to cover its shortfalls; (3) inflation will be at levels we have never seen because of higher import- ...
Is the U.S. dollar still the world currency? ›Other IMF analysis notes that the dollar is the dominant reserve currency by default. The absence of an alternatives to the safety of dollar-trade invoicing, international funding markets, and the large supply of guaranteed Treasury bonds suggests that the dollar's role in the global economy is secure.
What is the strongest currency in the world? ›1. Kuwaiti dinar. Known as the strongest currency in the world, the Kuwaiti dinar or KWD was introduced in 1960 and was initially equivalent to one pound sterling. Kuwait is a small country that is nestled between Iraq and Saudi Arabia whose wealth has been driven largely by its large global exports of oil.
What should I own if a dollar crashes? ›Gold, Silver, and Other Precious Metals
When there is a political or economic disaster, precious metals are traditionally considered a safe haven asset. And there is a reason for that. Precious metals can't be printed like paper money, which makes them a good hedge against economic collapse.
Countries worldwide are dropping the US dollar: De-dollarization in China, Russia, Brazil, ASEAN. (Se puede leer esta nota en español aquí.) The global de-dollarization campaign is gaining momentum, as countries around the world seek alternatives to the hegemony of the US dollar.
Will U.S. dollar lose its status as the global reserve currency? ›There have been plenty of headlines lately about the decline in value of the U.S. dollar and the potential for the currency to lose its status as the world's largest reserve currency. However, a look at history suggests such a dramatic shift in the global financial system isn't likely to take place anytime soon.
Where should I put my money if the dollar collapses? ›One of the most straightforward ways to profit from a weaker dollar is to invest in other fiat currencies. Foreign-exchange traders can make bets on currency pairs directly, but there are also publicly traded trusts and funds that allow investors to buy and sell international currencies just like stocks.
What will happen to silver if the dollar collapses? ›
Silver's Value Could Increase
One reason is because there's a limited supply of silver, meaning as demand increases if the dollar collapses, the value of silver will actually go up, since there's not an indefinite amount of silver left.
Today, like the currency of most nations, the dollar is fiat money, unbacked by any physical asset. A holder of a federal reserve note has no right to demand an asset such as gold or silver from the government in exchange for a note.
What would cause the U.S. dollar to collapse? ›This can be brought about through improper valuations or pegging, chronic low growth, or inflation. Currency collapses are caused by a lack of faith in the stability or usefulness of money—either as a way to store value or as a medium of exchange.
Is paper money going away? ›As people move toward more electronic or digital forms of payment, it might seem like paper money is on its way toward obsolescence. But experts say that cash will always be around.
What are the chances of the U.S. dollar collapse? ›It's not a likely outcome at all in most countries around the world, and that's particularly true for the United States. This is down to the U.S. dollar's status as the global reserve currency. So while technically the U.S. dollar could collapse, the chances of that happening any time soon are incredibly slim.
Is the dollar in trouble in 2023? ›After reaching parity with the euro in 2022, the U.S. dollar has weakened modestly in 2023. The dollar has also lost ground against other currencies. Changes in the dollar's value on currency markets can affect results for U.S. investors who put money to work in global capital markets.
What is the strongest currency than US dollar? ›Kuwaiti dinar (KWD)
The Kuwaiti dinar is the strongest currency in the world with 1 Kuwaiti dinar buying 3.26 U.S. dollars (or, put another way, US$1 equals 0.31 Kuwaiti dinars). Kuwait is located between Saudi Arabia and Iraq, earning much of its wealth from being a leading global exporter of oil.
Peru. It takes roughly 3.72 Peruvian soles to make one U.S. dollar (as of Mar. 8, 2022). Peru also boasts a strong tourism sector and beautiful sights, including Machu Picchu, and cities such as Arequipa, Ica, Cusco, and Lima.
What is the number 1 weakest currency? ›1. Iranian Rial (IRR) 1 INR = 516 IRR. The Iranian rial tops the list of the cheapest currencies in the world. The fall in the value of the currency can be explained by various factors.
What currency is worth the least? ›Iranian Rial (IRR)
Today 1 Indian Rupee = 516.79 IRR. Currently, Iranian Rial is considered world's least valuable currency. This is the result of factors like political unrest in the country. The Iran-Iraq war and the nuclear program also played a huge part.
What is the best performing currency in 2023? ›
LONDON — The British pound is the best performing G-10 (Group of Ten) currency of 2023, and some strategists believe the pound's rally can continue over the medium term.
What is the biggest threat to the dollar? ›The most proximate threat to the dollar and its global status would be a U.S. default resulting from the failure to raise the debt ceiling. For America, maintaining financial independence is a matter of national security. The kowtowing of the French president demonstrates the alternative.
What happens to gold if dollar collapses? ›If the dollar collapses what will gold be worth? According to Peter Schiff, the CEO and chief economist of brokerage firm Euro Pacific in a article from Capital, in the event of a loss of faith in the US dollar and rampant inflation, the value of gold could skyrocket tenfold, reaching $20,000 (£15,170) per ounce.
Who benefits from a weak dollar? ›Advantages and disadvantages of a weak dollar
A weak dollar can be a good thing for U.S. firms who want to sell goods in foreign markets. Because foreign products and services become relatively more expensive, U.S. products and services become more competitive overseas.
While the dollar has declined over the past six months, it remains close to a 10-year high versus currencies of countries with which the U.S. trades. It also remains the primary currency used for trade and financial transactions in the global economy.
What happens when U.S. dollar goes up? ›A strengthening U.S. dollar means it can buy more of a foreign currency than before. For example, a strong dollar benefits Americans traveling overseas but puts foreign tourists visiting the U.S. at a disadvantage.
Will the dollar become weak? ›Cats and Lethargy
Older cats might be experiencing age-related body changes, and arthritis and/or joint disease will certainly slow down most cats. In fact, any number of diseases, from heart conditions to cancer, can alter a cat's attitude and behavior.
Once holders of currencies begin to lose faith in the currencies, they'll attempt to exchange the currencies for tangible goods or other items that may be in high demand. This means that, at least for a time, you may be able to exchange your gold and silver coins for dollars to purchase goods and services, as needed.
What happens to my 401k if the dollar collapses? ›What will happen to my 401k if the dollar collapses? If your 401k is denominated in US dollars, then it collapses along with the currency.
Should you keep your money in dollars? ›Cost Saving:
Having dollars as savings saves you exchange rate costs and volatilities. For those who travel internationally frequently, saving in dollars can provide cost benefits because sourcing them comes at a higher level of purchasing power overseas.
Why is it illegal to own gold bars? ›
When the stock market crashed in 1929, the well-to-do rushed to convert their bank funds to more reliable gold bullion. This left the government without enough gold to back newly printed money. Therefore, President Franklin Roosevelt used his executive powers to make it illegal to own gold coins or bars.
What happens to gold if the dollar goes up? ›Because gold is generally dollar-denominated, a stronger U.S. dollar tends to drive gold prices lower, and vice versa. Real and expected inflation rates also affect the price of the metal.
How much of your savings should be in precious metals? ›In general, though, financial experts often recommend putting between 5 and 20% of your portfolio into gold or other precious metals, though some suggest an even greater allocation.
Can I get gold dollars from the bank? ›Where can I get golden dollars? The U.S. Mint sells golden dollars directly to the public from its website (Off-site), or you may ask your local bank if it has any inventory.
Will the US go back to the gold standard? ›The gold standard as it existed under the Bretton Woods system until 1971 is likely never coming back. There are a myriad of reasons for this but the most important lie with the US government's ability to control the economy.
What is China's currency backed by? ›As China and Russia develop their currency backed by gold, U.S. investors could see an increase in the price of gold and other precious metals due to increased demand from these countries' economies.
What is the forecast for yuan to usd? ›Predictions and US Dollar to Chinese Yuan exchange rate forecasts from market pricing sources, investment banks and technical analysts. In one month the US Dollar / Chinese Yuan exchange rate could be at 7.0788 according to market pricing as of 26/05/2023.
Is the Chinese Yuan replaces the US dollar becoming the most traded currency in Russia? ›In recent years, there has been a shift in the global currency landscape, with China's yuan steadily gaining ground against the US dollar. This trend is reflected in Russia, where the yuan has now overtaken the dollar as the most traded currency.
Will the US dollar lose its reserve status? ›Losing reserve status
As much as we believe it is unlikely that the U.S. dollar will lose its position on the global economic stage, even if it were to be displaced, the implications may not be as dire as currently anticipated.
The Chinese Yuan is expected to trade at 7.01 by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate it to trade at 7.28 in 12 months time. The USDCNY exchange rate is a reference rate not used in actual currency trading.
How much is $100 usd in Chinese yuan? ›
“At present, the valuation of the domestic stock market is relatively low, and the interest rate difference between China and the United States is stable and convergent, so yuan assets will show good investment value,” Pang told a press conference in Beijing.
How many yuan do you expect to buy for $1? ›| Conversion rates US Dollar / Chinese Yuan RMB | |
|---|---|
| 1 USD | 7.06470 CNY |
| 5 USD | 35.32350 CNY |
| 10 USD | 70.64700 CNY |
| 20 USD | 141.29400 CNY |
The U.S. is the world's largest economy by GDP and the U.S. dollar is by far the most-traded currency globally. The U.S. dollar is also the largest reserve currency in the world (the currency most held by central banks) and is the currency used to price many commodities, including oil, gold and copper.
What currency is China controlling? ›Because of its unique export-dependent economic system, China's money supply policies vary from methods used by other nations. Two ways China manages its money supply is by controlling forex rates and printing currency. The PBOC can also control the money supply by changing the reserve ratio and the discount rate.
Does China depend on the U.S. dollar? ›China does not have a floating exchange rate that is determined by market forces, as is the case with most advanced economies. Instead it pegs its currency, the yuan (or renminbi), to the U.S. dollar. The yuan was pegged to the greenback at 8.28 to the dollar for more than a decade starting in 1994.
What would cause the US dollar to collapse? ›This can be brought about through improper valuations or pegging, chronic low growth, or inflation. Currency collapses are caused by a lack of faith in the stability or usefulness of money—either as a way to store value or as a medium of exchange.
Is the US losing its dollar? ›While the dollar has declined over the past six months, it remains close to a 10-year high versus currencies of countries with which the U.S. trades. It also remains the primary currency used for trade and financial transactions in the global economy.
Is the yuan backed by anything? ›The Chinese gold yuan issue is fully provisioned, its composition must be composed of assets of which 40% must be gold, silver and foreign exchange currency, with the remainder being filled with marketable securities and government-designated state-owned business assets.
How much is the yuan to the dollar in 2023? ›Currency Menu
This is the US Dollar (USD) to Chinese Yuan (CNY) exchange rate history data page for the year of 2023, covering 145 days of USD CNY historical data. Best exchange rate: 7.0941 CNY on 25 May 2023. Average exchange rate in 2023: 6.8776 CNY.
Will the yuan expire? ›
Answer: The official digital Yuan issued by the central bank of China does not has the expiration date.