De-dollarization has started but Yuan takeover is “essentially impossible”
De-dollarization has begun as recent trade deals elevate rivals, but the greenback is likely to remain a global currency, according to economist Peter C. Earle.
He pointed to last month’s deal between China and Brazil to settle trade in each other’s currencies, noting that it’s the latest example of a growing trend.
Writing in the American Institute for Economic Research last week, Earle added that use of the dollar in “economic warfare” as well as “error-fraught monetary policy regimes” are driving countries away from the greenback.
“And slower or more quickly, the dollar will lose ground abroad,” he said.
But in a follow-up post on Tuesday, Earle added that while rivals make gains, the dollar is still likely to remain a global currency.
“First, barring a truly extraordinary event or series of developments, a scenario in which the dollar is no longer used (at all) in international trade is highly unlikely,” he said.
He cited the vast size of the US economy and the breadth of its trading relationships, adding that there are high barriers to exit as well as high costs for switching currencies. Such a shift would take decades, if not generations, he said.
Meanwhile, despite China’s efforts to elevate the yuan on the world stage and replace the dollar, Earle is highly skeptical.
“Even beyond the decades that such a change would probably take, the likelihood of the yuan becoming the global reserve currency ranges between profoundly unlikely to essentially impossible,” he wrote.
Earle’s note comes as China has actively established agreements with countries such as Kazakhstan, Pakistan, Laos and Brazil to use the yuan for cross-border transactions, replacing the dollar.
The renminbi has overtaken the dollar as the most used foreign currency in Russia, especially as the country improves its ties with China since being cut off from global finance after its invasion of Ukraine.
But the yuan is poorly suited to become the world’s central currency, as it is virtually pegged to the dollar, Earle said. The yuan is only allowed to trade in a 2% range against a midpoint determined daily by China’s central bank.
Alongside the fact that Chinese authorities also decide on what capital can flow out of the country, this makes the yuan unreceptive to free market flows.
“These (and a handful of other characteristics) are simply not conducive to establishing a currency that will be used as a unit of account, medium of exchange, and/or basis for settlement in countless international transactions daily,” he wrote.
Venture capitalist Chamath Palihapitiya also described de-dollarization concerns as a “nothingburger,” and cited similar reasons in arguing that the yuan would not become the dominant currency.
Meanwhile, Carson Group noted that the dollar would be around for a while, pointing to the world’s proven trust in it and its prominence in international trade.
