Chinese Yuan Unlikely to Replace US Dollar as World Reserve Currency, Says Strategist

US Dollar v Chinese Yuan

In a note, Skylar Montgomery, senior global macro strategist at Globaldata TS Lombard, explained that the Chinese yuan is unlikely to replace the U.S. dollar as the world’s reserve currency. She highlighted that the U.S. dollar’s reserve currency status gives the U.S. significant political, economic, and market influence. However, the weaponization of the dollar by the U.S. government has led countries like Russia and China to seek alternatives. The BRICS countries recently agreed to promote the use of local currencies in international trade instead of relying on the U.S. dollar. Despite a worldwide de-dollarization trend, the U.S. dollar still dominates due to the lack of a clear alternative.

The U.S. dollar’s reserve currency status grants the U.S. significant political, economic, and market influence.
Russia, China, and other BRICS nations are seeking alternatives to the dollar due to its weaponization by the U.S. government.
The BRICS countries have agreed to promote the use of local currencies in international trade.
The U.S. dollar’s share in global currency reserves has declined, but it still remains the majority.
No currency, including the Chinese yuan, has emerged as a clear alternative to the U.S. dollar.

In addition to the lack of a clear alternative, the Chinese yuan faces limitations such as a closed capital account, unwillingness/inability to run a current account deficit, unpredictable government intervention, and a managed currency. Dario Perkins, managing director of global macro at Globaldata TS Lombard, explained that a reserve currency must be willing to run large and persistent current account deficits, something the U.S. is able to do. Economist Benn Steil and market analyst Zain Vawda have also stated that the Chinese yuan is not a threat to the U.S. dollar.

Hot Take: While there is a global trend towards de-dollarization, the lack of a clear alternative and the limitations faced by the Chinese yuan suggest that the U.S. dollar will continue to dominate as the world’s reserve currency for the foreseeable future.