US dollar still world’s reserve currency, but Yuan's future dawns
5 Min Read
Even though several countries across the world have been recalibrating their trade policies to substitute the US dollar with other currencies, the US dollar currently maintains its reputation as the safest and most convenient currency in the world.
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A 3D-printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020. (Reuters)
An analysis written by Frank Holmes for VettaFi revealed on Monday that the greenback is unlikely to lose its status as the world's global reserve currency any time soon despite that trends of de-dollarization have picked up speed over the past year.
Even though several countries across the world have been recalibrating their trade policies so as to substitute the US dollar with other currencies, the US dollar maintains its reputation as the safest and most convenient currency in the world.
As Holmes pointed out in his piece, the share of global central banks' official holdings in US dollars currently stands at 60% nowadays, while that of the Yuan is a mere 2.8% as of September 2022.
A stark difference indeed, but it is worth appreciating the fact that in the span of 20 years, the share of US dollars fell sharply as it stood at 72% in 2001. China, on the other hand, has had its own share double since 2016.
The case in point is obvious. The credibility of the dollar remains unquestionable, although no predictions can foretell that it may remain the case on the long run. The reason, Holmes explain, is because the strength of the US dollar lies on the dollar-commodity relationship, whereby the price of oil is quoted in US dollars.
Read more: Russia & Egypt consultations for de-dollarization underway
Rise of the Petroyuan
Oil, being the world's most strategic commodity, gave great leverage to the US dollar over the past five decades, particularly since the US struck a deal with Saudi Arabia in the early 1970s to fulfill the Arab country's economic and security needs in exchange of guarantees that their oil be priced in dollars.
This was the trigger point in time when other members of the OPEC alliance decided to follow suit, a decisive moment that marked the birth of the petrodollar.
But something - or many things - happened in the span of just one year. First, it is worth recalling that China recently brokered a deal between Iran and Saudi Arabia which is likely to compromise the petrodollar, the driving force of the US bond market and the dollar itself, as oil exporters invest their trade surpluses in treasuries.
Second, in a recent meeting between the two world leaders, Russian President Vladimir Putin and Chinese President Xi Jinping, China recently announced that it would purchase oil from Russia in its own currency.
The Yuan has especially gained more prominence in energy markets - so much so that analysts have gone as far as foretelling the coming of a petroyuan.
Gold is the hottest commodity
Just a week ago, Aramco announced a $10 billion project aiming to build a refinery and petrochemical complex in China. In addition, Aramco vowed to supply 480,000 barrels of Arab oil per day to subsidiary Rongsheng Zhejiang Petroleum and Chemical as part of the strategic agreement.
These strategies, combined with recent hikes in purchases of gold, have been pushing for innovative financial alternatives against trade in the US dollar.
Read more: In a first, Iraq allows using yuan to settle transactions with China
Gold, in particular, has recently revealed itself as the hottest commodity in the world - especially for economies striving to diversify away from the dollar.
Almost a year after Russia announced it pegged the ruble to gold, the Central Bank of Russia announced last week that its bullion holdings increased by an estimated 1 million ounces over the past 12 months.
By the end of February 2023, the bank reported owning nearly 75 million ounces, up from about 74 million a year earlier.
A single BRICS currency
In short, Holmes argues that a loss of credibility in the greenback has several implications, ranging from currency risks to a decrease in demand for treasury bonds which could spiral an out-of-proportion hike in interest rates.
Buying gold provides a safe haven asset that can protect investors' portfolios and provide cover against volatility.
Last Thursday, State Duma Deputy Chairman Alexander Babakov said that the BRICS is planning to create its own currency and is scheduled to present ideas on the matter at the organization's forthcoming summit in South Africa in august this year.
"The transition to settlements in national currencies is the first step. The next one is to provide the circulation of digital or any other form of a fundamentally new currency in the nearest future. I think that at the BRICS [leaders' summit], the readiness to realize this project will be announced, such works are underway," Babakov said on the sidelines of the Russian-Indian Strategic Partnership for Development and Growth Business Forum.
Babakov further did not dismiss the possibility of the formation of a single BRICS currency. According to him, the currency would be secured not just by gold, but also by other groups of products, including rare-earth elements of the soil.
Read more: China, Brazil announce de-dollarization of mutual trade
