By Jeff Desjardins, Visual Capitalist
© Flickr/ Images Money
The dollar has been a stalwart of international trade over the majority of the last century. Around the time of the formation of the Eurozone, it reached its recent peak at 71.0% of official foreign exchange reserves. Since then, its composition of global reserves has more recently dropped to a more modest 62.9% in 2014.
However, the dollar is slowly losing its status as the world’s undisputed reserve currency.
This is not an unusual event as far as history goes. In fact, about every century or so since the Renaissance, the global reserve currency has shifted. Portugal, Spain, The Netherlands, France, and Britain have had dominant currencies at different times.
Today’s infographic shows that the wind is shifting in international trade. With less countries and organizations using the dollar to settle international transactions, it slowly chips away at its hegemony of the dollar. China is at the epicenter and the country is making continued progress in cutting deals outside of the U.S. dollar framework. Deals shown in the graphic are currency flows between countries that have abandoned the dollar in bilateral trade, as well as countries that are considering such measures.
Infographic courtesy of Visual Capitalist.
The most recent culmination of these trends is the creation of the Asian Infrastructure Investment Bank (AIIB), a China-led rival to the World Bank and IMF that includes 57 founding countries and $100 billion of capital. The United States is not a member and has actively lobbied its allies to avoid joining due to perceived governance issues.
Other recent deals by China include: a 30-year $400 billion energy alliance with Russia, a second energy deal focusing on natural gas worth $284 billion with Russia, and a deal removing tariffs on 85% of Australian commodity exports to China. Further, China and Russia have agreed to pay each other in domestic currencies in order to bypass the U.S. dollar.
It is not only the Chinese that are starting to question the viability of the dollar. A report in 2010 by the United Nations called for the abandonment of the U.S. dollar as the single reserve currency. The Gulf Cooperation Council has also expressed desires for an independent reserve currency.
In the short term, especially with a crashing Chinese stock market and fledgling Eurozone, the dollar will likely reign supreme. It’s still a stretch for the yuan to make its way into foreign reserve coffers so long as capital controls remain in place and the country’s bond market is not open or transparent to offshore investors. However, Beijing is currently mulling ways to internationalize the yuan, and each step it takes will take China closer to challenging dollar hegemony.
With more bilateral trade transactions bypassing the dollar, and the increasing internationalization of the Chinese financial system, the yuan is eventually going to give the dollar a run for its money.
Its interesting to discuss the change of Global exchange currency from USD to Yuan, but seems quite difficult to see this happening. The strength of USD is visible during last 5- 6 years post global meltdown wherein it has strengthen despite slowdown in US. China although growing fast but has recently started showing signs of loosing the sheen and doubts of further sustenance of growth story are increasing. Although rise of another global currency as strong replacement of USD will be a welcome step.
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Posted by Vishal Puri | July 22, 2015, 6:45 amChina still has a long way to go before it can become a reserve currency. First it must make the RMB fully convertible, which it has tried before but not yet succeeded. The Chinese government’s first concern is that full convertibility will result in significant capital outflows as wealthy Chinese attempt to diversify their holdings. To mitigate that risk, the Chinese government must create a system of internal laws consistently enforced protecting property rights. Such practices would convince its wealthy citizens that freely keeping the vast majority of their wealth in China is the better option. Given Chinese history since 1949, it would take considerable time for the centeral government to demonstrate that in practice. Commodity poor China has been executing bilateral trade agreements with commodity rich countries in exchange for its expertise in engineering, construction, manufacturing, etc. Executing such trades with Russia or poor African countries suggests more of a bartered exchange (yes, it bye-passes the US in the near term but also imposes certain limitations on both parties that place practical limits on ). Finally, making the RMB a reserve currency depends on resolution of the ‘moral hazard’ posed by the lack of transparency in government, business, legal information available in China. All these things suggest to me it may take longer than some expect for the RMB to supplant the Dollar as a reserve currency.
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Posted by Mark Thernes | July 22, 2015, 3:59 pmYou don’t have to be great or even good, just better than your closest alternative. It seems US has taken really taken that to heart
. Bitcoin or something similar seems like the most viable candidate at the moment to make a run for reserve currency status.
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Posted by andypai (@andypai) | July 23, 2015, 12:48 amReblogged this on variusevanssingapore.
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Posted by immz3us | July 24, 2015, 8:31 pmIn order to become a world reserve currency you have to be willing to produce and send the equivalent of TRILLIONS of US Dollars out into the world markets, and then be willing and able to take them out of the system again.
No other nation has this willingness or capacity to execute this and manage the system for the entire world.
IF we see a change in reserve currency it will be to a basket system. Spread the risk, share the obligations and the costs. But that will open a whole new set of issues as there will be massive management issues to contend with if this comes to pass.
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Posted by M. williams | July 25, 2015, 11:51 pm