The fall of the dollar as the world’s reserve currency is a fact that has been speculated for years, and the yuan is on the rise.
China’s rapid recovery from the effects of the pandemic has once again sparked ongoing debate about how long the dollar’s dominance in world markets can last for half a century.
The difficulty the United States has had in controlling the coronavirus and reactivating its economy is in stark contrast to the Asian nation, where growth has recovered. That divergence – which led the dollar to its worst performance since 2017, as the yuan progressed – bolstered China’s momentum against the dollar’s hegemony, with investors migrating to onshore assets, using the renminbi for trading, and even a new look. as a reserve currency.
The fall of the dollar as the world’s reserve currency is a fact that has been speculated for years. Before the yuan, it was all about the euro as the successor to the dollar. However, nothing succeeded in influencing the two forces underpinning the dollar’s supremacy: the US’s role as an engine of global growth and a haven of choice for investors during crises.
But recently, the coronavirus started to erode these traditional pillars of the currency. Now the yuan is the currency benefiting from the demand for superior economic performance and assets protected from the effects of the pandemic, allowing us to refocus on the currency’s long-term outlook.
“The center of the world economy is shifting from the North Atlantic Ocean, where it has been for 500 years, to the Pacific Ocean. Currency markets will reflect this over time, ”said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Yuan fort
It’s a somewhat ironic end to President Donald Trump’s quest for a weaker dollar. Despite frequent criticism of the Beijing authorities for controlling the Chinese currency to support Chinese exports at the expense of the US, and starting a trade war to put pressure on China, it took a pandemic to turn the tide. times. .
China is reaping the benefits. The world’s second-largest economy is now preparing to replace the US as the main growth engine in 2028, five years earlier than expected a year ago, thanks to a better response to the pandemic, the Center said. from Economic and Business Research last month.
While US GDP is expected to recover by 3.9% in 2021, China could end the year with growth of more than 8%. In addition, China’s central bank is considering tightening monetary policy, in stark contrast to the Federal Reserve’s pledge to continue with accommodative measures, which contributed to the weakening of the dollar.
In fact, some believe that China’s own economic success, especially as it becomes a pivot in the global supply chain, will reinforce the trend towards low interest rates elsewhere and increase divergence.
“UNITED STATES OF AMERICA. And other countries continue to rely on China’s supply chain to contain the pandemic while the vaccines are distributed. That edge is what keeps G10 banks very accommodative,” said Ben Emons, director of macro strategy at Medley Global Advisors.