The yuan will hardly compete with the dollar in the coming years, but who knows what will happen in 10 or 20 years.
The dollar’s dominance will end, sooner or later
The lower the USD falls, the more often they talk about the end of its dominance in the market. This kind of talk isn’t something new: at the beginning of the 21st century, the main claimant to the throne was the euro. Nowadays, it’s the yuan. The single European currency hasn’t ever been the first racer, but the yuan may be the one in the next few years. Unless the greenback itself yields the first place to the Chinese currency:
– My husband made me an incredible, fantastic, unforgettable gift last night!
– Wow, was he passionate and insatiable?
– No, he went on a business trip yesterday.
I can hardly imagine that the world’s fifth currency used for international payments, with a market share in conversion operations and gold & currency reserves of less than 5 percent, can be a serious competitor of the first global currency. However, it’s a speed that matters in Forex, where time is measured in decades and a year is a negligibly small period. In 2010, the renminbi ranked 35th among the world’s payment currencies. Its share in central banks’ reserves has been growing fast since then. For reference, the greenback’s share dropped to its lowest value last seen in the 90ies.
The dollar’s dominance wasn’t questionable before the pandemic. It even gave birth to the “dollar’s smile” notion: when the USD index fell, almost no one doubted it would grow again. These days, the smile is looking more like a grin. The greenback’s power was based on two basic factors: a belief that the US is a benchmark of the global economy and a habit of using the USD as a safe-haven asset during crises. The dollar’s evolution affects many Forex pairs’ moves, but many things changed in 2020. HSBC remarks on the yuan’s significant influence on the euro’s, the pound’s, and commodity currencies’ rates. At the same time, Societe Generale mentions that the renminbi is the best indicator of investors’ appetite for risk. What will 2021 be like? It depends on the current Chinese diet.
It’s Asia and not North America that investors often look at more often when forming their investment strategies. Trump’s last attempts to ban the Americans from buying Chinese stocks look miserable. The foreign portfolio investment in China grew 30% from January to September, and this trend has only started developing. The investors are fed up with the dollar. Is it essential to know who is guilty?
– Darling, it seems I’m pregnant. I don’t know who the father is, but it’s you who makes me sick.
Not only did the pandemic undermine the dollar’s authority, but it also took away its main trump – the belief that the US pushes the global economy upwards. The US GDP will hardly grow by as little as 4% in 2021. I doubt it can return to the levels seen at the end of 2019. Its Chinese peer may grow 8% and 10%, compared with 2020 and 2019, respectively. Who is the global economy’s driver these days? The answer is evident.
Furthermore, COVID-19 moved China’s estimated economic superiority in terms of GDP from 2033 to 2028. Time is measured in decades in Forex. New kings are born, old kings yield the throne. Life goes on!
Price chart of USDCNH in real time mode
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