The fall of the dollar as the world’s reserve currency is a fact that has been speculated for years, and the yuan has strengthened.
China’s rapid recovery from the effects of the pandemic has once again fueled the ongoing debate over how much the dollar can dominate world markets for half a century.
The difficulty the United States has had in controlling the coronavirus and reactivating its economy contrasts sharply with the Asian nation, where growth has returned. This divergence – which led the dollar to its weakest performance in 2017 as the yuan advanced – strengthened China’s drive against the dollar’s hegemony, by migrating investors to onshore assets, using the renminbi for trade and even looking new. 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, all the fuss was about the euro as the successor to the dollar. However, nothing has managed to impact the two forces behind the supremacy of the dollar: the role of the US as an engine of global growth and a first-class investor’s paradise during crises.
But recently, the coronavirus has begun to erode these traditional pillars of the currency. Now, the yuan is the currency that benefits from the demand for superior economic performance and assets protected from the consequences of the pandemic, again allowing it to focus on the long-term prospects of the currency.
“The center of the world economy is moving from the North Atlantic, where it has been for 500 years, to the Pacific. Foreign exchange markets will reflect this over time, ”said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Yuan Fortress
It is a somewhat ironic end to President Donald Trump’s search for a weaker dollar. Despite frequent criticism of the Beijing authorities for controlling the Chinese currency to support Chinese exports to the detriment of the United States and for starting a trade war under pressure from China, a pandemic was needed to change the tide. .
China is reaping the rewards. The second largest economy in the world is now preparing to take the place of the US as the main engine of growth in 2028, five years earlier than expected just a year ago, thanks to better treatment of the pandemic, the Center said. economic and business research last month.
Although the US GDP is expected to return by 3.9% in 2021, China could close the year with an expansion of over 8%. Moreover, China’s central bank is considering tightening monetary policy, a stark contrast to the Federal Reserve’s promise to continue accommodative measures, which has helped weaken the dollar.
In fact, some believe that China’s economic success itself, especially as it becomes a focal point of the global supply chain, will strengthen the trend towards lower interest rates elsewhere and increase divergence.
“The United States and other countries continue to rely on the Chinese supply chain to control the pandemic as vaccines are distributed. This edge is what keeps G10 banks extremely accommodative,” said Ben Emons, CEO of macro strategy at Medley Global Advisors.