Strong dollar facing more competition as yuan rises
While so much attention has been focused on the strengthening of the U.S. dollar, China's renminbi has quietly broken into the top five most used global payment currencies. That’s according to Swift, the international currency clearing system. In December, 2.2% of global payments were conducted in renminbi, surpassing transactions made in both the Canadian and Australian dollars.
The renminbi, as known as the yuan, now sits behind the Japanese yen, the British pound, the euro and the U.S. dollar. The U.S. dollar saw the greatest share of global payment currencies at 44.64%.
While the renminbi still represents a small percentage of global trade, its rise raises the question: Should we be talking about threats to the dollar’s reserve status, even at a time when the dollar is strengthening? The U.S. dollar has traditionally been a safe haven in times of stress. But Iran has said it's not going to conduct foreign trade transactions in the dollar anymore. And Russia's Vladimir Putin wants to do deals in currencies other than the dollar, particularly with China.
Not so fast, says FT Alphaville’s Cardiff Garcia who is skeptical that the U.S. is getting close to the point where the dollar’s status as the world’s reserve currency is under threat. “If anything,” says Garcia, “I think it’s been reinforced by our experience in the last seven years” as the dollar has strengthened against other currencies.
But the rise of other currencies in terms of transactions points to a longer term trend toward a more diversified global financial system. Garcia says it shows more currencies can hold their own which he says is “largely a healthy thing.” Garcia points out that because so many global transactions are happening in the dollar, even if it were to decline a little bit that would “really be fine.”
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Most economists agree is that no currency will be able to dethrone the dollar in the coming years, but not everyone thinks the dollar should—or will—maintain its status as reserve currency. There are downsides to having the dollar as such a strong reserve. For example, it can interfere with policymaking. “Look at what happened in the middle of the last decade when Greenspan was trying to hike rates and the long rates wouldn’t budge,” says Garcia. “Part of the issue here was that, because the dollar and in particular because our sovereign bond market is so deep and liquid, so much capital flowed to the U.S. at a time when there was excess savings throughout the rest of the world.” What ended up happening, Garcia points out, was that capital was filtered into subprime mortgage-backed securities. The financial crisis, of course, followed.
Another argument against having the U.S. dollar as the world’s reserve currency is that it also interferes with exports. This summer, The New York Times ran an op-ed by former White House economist Jared Bernstein. In the column, Bernstein argued that the dollar's status as the world's reserve currency is a "privilege” and one that America can no longer afford. Bernstein, who is now a senior fellow at the left-leaning Center on Budget and Policy Priorities, pointed out that nations like China and South Korea suppress the value of their currencies relative to the dollar in an effort to boost their exports to the U.S.
"They buy lots of dollars, which increases the dollar’s value relative to their own currencies," Bernstein wrote, "Thus making their exports to us cheaper and our exports to them more expensive." That spells a ballooning trade deficit.
But depite the recommendations from Bernstein and others, don't expect a change in the dollar's status any time soon. “This is a pro-stability force for global financial markets so I think that for now the dollar’s reserve status is safe. But if it changes that’s fine,” says Garcia. Even if the dollar doesn’t continue to dominate global finance as it has, “the U.S. economy itself wouldn’t suffer,” says Garcia. “And I think there would be no danger there. It might even be a healthy thing.”
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