Why dollar dominance is unlikely to be challenged

A gauge of the dollar rose 0.2% on Monday, after its first weekly loss in a month.

“You can buy yen, euro or Aussie to diversify but I don’t think they can truly replace the dollar as a reserve,” said Kerry Craig, strategist at JPMorgan Asset Management in Melbourne. “The US remains a dominant power on the global economic stage.” 

While the Central Bank of Russia had made inroads in reducing its dollar holdings in favour of alternatives such as gold, recent events show that its efforts may have been in vain, according to Agnes Belaisch, chief European strategist at Baring Investment Services in London.

“Holding nondollar reserves means reliance on counterparties to exchange them against a means of payment,” said Belaisch, whose firm oversees $391bn. “One cannot pay with gold bullion, like one cannot pay at scale with bitcoins. At the start and the end of the chain are dollars.” 

That’s not stopping attempts to create challengers to the dollar, with China’s efforts to internationalise the yuan gaining greater attention. 

At a Senate Banking Committee hearing this month, Fed Chair Jerome Powell said the war in Ukraine may accelerate Beijing’s efforts to develop alternatives to dollar-dominated international payments infrastructure. Goldman Sachs sees the yuan overtaking the yen and pound to become the world’s third-largest reserve currency by 2030, and Morgan Stanley sees the Chinese currency accounting for up to 10% of global forex assets in the coming decade. 

The US decision to weaponise the greenback is accelerating the shift to alternatives such as the yuan, said Benjamin Jones, director of macro research at Invesco, which oversees $1.5-trillion. While the Chinese currency may not overtake the dollar, it could become “the other reserve asset that will work side by side through time”, he said. 

Others are unconvinced. Allowing a currency to trade freely is essential for global status and Beijing’s influence over the yuan is seen as an obstacle. China’s emerging-market status is also proving to be a hindrance, as the world’s second-largest economy trails the West in developed financial infrastructure. 

The yuan’s share of payments over the Swift global system stands at just 3%, compared with 40% for the dollar and 37% for the euro.

Even news that Saudi Arabia was considering pricing some sales of oil to China in yuan has failed to impress investors. 

“China has the economic power to match the old hegemonic power of the US, however it has yet to build the infrastructure to become a financial powerhouse,” said Anders Faergemann, senior portfolio manager for global fixed income at PineBridge Investments. “The renminbi still feels like an afterthought in financial markets” for now, he said.

That’s a sentiment shared by Steven Barrow at Standard Bank in London.

“The problem in China’s case is that the very capital controls that help insulate the currency and the financial system from the vagaries of Fed policy and dollar volatility, are the same ones that prevent the renminbi becoming a serious rival to the dollar,” said Barrow, who is head of currency strategy. 

The yuan’s share of global foreign-exchange reserves is at about 2.7%, trailing the yen and sterling. 

Other dollar alternatives also have drawbacks. 

The euro is the most widely held currency in reserves after the greenback, but its reputation remains scarred from its near-death experience during the eurozone crisis. Gold, the global reserve asset for much of the 20th century, is impractical to move swiftly in a world where money changes hands at the speed of light. 

Cryptocurrencies, free of fiat shackles, are too new and volatile to claim global status.  

This leaves investors with no truly viable alternative to the dollar, said Jack McIntyre, a portfolio manager at Philadelphia-based Brandywine.

“Can I think of any country that matches the US’s economy, military might and its deep markets right now? No, I can’t,” he said. “We’re not at that point where the dollar can be challenged.”

Bloomberg News. More stories this are available on bloomberg.com

Source: businesslive.co.za