The U.S. dollar has been on a roller coaster ride in 2020. It went from one of the top-performing currencies in international markets to cratering 7% in only a few months. As the Federal Reserve embarks upon an inflationary campaign and investors become more confident in global financial markets, the dollar is being weighed down against a basket of currencies. The buck may have bigger fish to fry in the long-term: the de-dollarization initiative, brought to you by China and Russia.
Comrades in Commerce
China and Russia are engaging in an economic alliance to reduce the U.S. dollar's ubiquity. According to new first-quarter data from Russia's central bank and Federal Customs Service, the greenback's representation of bilateral commerce between Beijing and Moscow plunged to below 50% for the first time, down from 90% in 2015.
During the January-March period, the countries turned to the euro, accounting for a record high 30% of their settlements. The ruble and the yuan also represented a record-high 24% of their transactions.
This is part of the broader de-dollarization strategy engaged by both nations, and if it continues down this path, China and Russia will establish a de facto coalition. And this is not something that just happened as they have been moving away from the dollar for the last five years. President Vladimir Putin wants to de-dollarize the Russian economy to lessen its vulnerability to perpetual threats of U.S. sanctions. Beijing expanded its efforts when Washington initiated the trade war.
In 2014, the Chinese and Russian leadership inked a $24.5 billion three-year currency swap agreement that would allow each market to access the other's currency without having to buy it on the foreign exchange market. Both sides viewed the arrangement as a critical function that the pact was extended for another three years.
Will it be as simple as waving goodbye to the greenback? Not quite, says Dmitry Marinchenko, an analyst at Fitch Ratings. For one thing, Russia still depends immensely on the dollar to cover its imports from the European Union.
“It seems that these changes correspond exactly with Rosneft’s transition to settlement in euros. It’s more convenient to settle accounts in dollars though, so you shouldn’t expect complete de-dollarization," Marinchenko told Bloomberg.
But as the two countries take their de-dollarization plans to the next level, the rest of the global financial system may not be as keen. Last year, Bank for International Settlements (BIS) data highlighted that the share of currency trades in the buck surged from 87.6% in 2016 to 88.3% last year. Also, dollars represented about 60% of global foreign currency reserves.
Still, we may be in the early phase of America’s foes making a clean break from the dollar.
Tomorrow the World?
Could we see a prevalence of the Chinese yuan? That is Beijing's long-term objective.
The People's Bank of China (PBoC) recently published its annual RMB Internationalization Report, in which it recommends increased adoption for the yuan in cross-border trade. Officials have made it clear for the last 18 months that they want the yuan to be viewed as a global currency.
Some dismissed the proposal due to investors' concern over uncertainty, unpredictability, and intervention. However, with the government embracing market-oriented reforms, many analysts believe Beijing could reshuffle the international currency arena. The market is already starting to indicate its acceptance of the yuan. Last year, cross-border use of the yuan advanced 24.1%.
This year, global benchmark indexes have inserted debt from the world's second-largest economy. In the second quarter, foreign inflows to Chinese bonds hit an all-time high of $33.5 billion. In July, inflows hit a monthly record high of $20 billion. They also account for more than 5% of the Bloomberg Global Aggregate Bond Index and nearly 10% of JPMorgan Chase's emerging market bond index. The trends make sense, considering that FTSE China government bond index has extended investors an annual rate of return of 4.2%.
The yuan has appreciated in the aftermath of the Coronavirus pandemic, sliding below the crucial seven mark against the dollar. The consensus on Wall Street is that it will test the 6.8 and 6.9 range by the year’s end.
Fiat for Fiat
Does China want the yuan to possess global reserve status? Or does it aim to end dollar hegemony? Does it matter? That is perhaps a better question to ask since substituting the buck for renminbi – or the ruble – would not advance the cause of sound money. The only thing the central planners and globalists are achieving is swapping one fiat currency for another. If Beijing, Moscow, or any other power had triggered a campaign to adopt money that is backed by something tangible, then perhaps this would be a worthwhile pursuit. For now, the power players are attempting to curtail America’s geopolitical and military might by clamping down on the dollar. But they would be better off allowing the Federal Reserve to do their bidding since Chair Jerome Powell and Co. are already decimating the currency.
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