Opinion | The world is slowly drifting away from the US dollar as the sole reserve currency
- More than 60 central banks are showing interest in increasing their foreign reserves in Chinese yuan
- In future, the US dollar may be viewed as just one of several leading currencies alongside the yuan
There is growing resentment with the way the United States uses the privileged status of its currency within the international financial system as an instrument of its national policies. The latest expression of this came on February 1, when Germany, France and Britain launched an EU-backed payments system to help businesses circumvent unilateral US sanctions against Iran. Named the Instrument for Supporting Trade Exchanges, it is designed to act as a kind of euro-denominated clearing house for trade with Tehran.
Meanwhile, more than 60 central banks are showing strong interest in increasing their foreign reserves in the Chinese yuan and diversifying away from the US dollar. In June 2017 the European Central Bank for the first time switched 500 million euros (US$564.78 million) of its foreign exchange reserves from US dollars to yuan. According to the International Monetary Fund (IMF), during the third quarter of 2018 holdings of yuan assets by global central banks increased to US$192.54 billion, 1.8 per cent of all reserves.
France’s central bank and the German Bundesbank recently included the yuan in their foreign exchange reserves. The central banks of Belgium and Slovakia already possess yuan assets, while those of Spain and Switzerland have also expressed their interest in the currency. Central banks in Africa, Central and Southeast Asia have even bigger shares of their foreign exchange reserves in yuan.
It was reported in January that during the second quarter of 2018, joining the trend, the Bank of Russia twice reduced the amount of its foreign exchange held in US dollars and moved the equivalent of US$44 billion each into euros and yuan, with another US$21 billion invested in the Japanese yen. The share of Russian foreign exchange reserves held in yuan has increased from five to 15 per cent. That means that Russia’s yuan share is about 10 times the average for global central banks, with its total holdings of the currency constituting about a quarter of world yuan reserves.
Standard Chartered Bank predicts that the yuan, currently the world’s sixth most used currency for payments (its share in global payments stood at 1.7 per cent in October 2018), will be the fourth most used by 2020, after the US dollar, the euro and the pound. According to the People’s Bank of China, US$545.5 billion (3.71 trillion yuan) worth of cross-border trade was settled in yuan in the first three quarters of 2018.
