Abuse of hegemony is why de-dollarisation is trending

 US itself is accelerating the de-dollarization process

 De-Dollarization and the Fall of American Hegemony

Ever since the Fed ended its ultra-loose monetary policy and turned to a radical rate hike approach, the international financial market has been in turmoil with many currencies depreciating sharply. That has forced many countries to diversify their foreign exchange reserve assets. – AP

 

MARKET expectations for the Federal Reserve to end interest rate hikes have picked up as core inflation data in the United States has dropped and the University of Michigan’s consumer confidence index fell from 67 in February to 62 in March – yet worries abound about the outlook for the US economy.

Former US Treasury secretary Larry Summers said recently that it is too early to say that the US has shaken off the financial woes caused by its rapid interest rate hikes. The US economy is likely to experience a serious recession as a result of the recent banking crisis, with little chances of a “soft landing”. With recession expectations picking up, the factors supporting a strong US dollar are disappearing.

Ever since the Fed ended its ultra-loose monetary policy and turned to a radical rate hike approach, the international financial market has been in turmoil, with many currencies depreciating sharply. That has forced many countries to reduce holdings of US Treasuries, diversifying foreign exchange reserve assets.

In mid-march, Russia’s central bank reported that the ruble and “friendly” currencies together accounted for 52% of Russian export settlements at the end of 2022, surpassing the share of the US dollar and euro for the first time on record.

The members of Asean agreed at the end of March to strengthen the use of local currencies in the region and reduce reliance on major international currencies in cross-border trade and investment. On April 1, India and Malaysia agreed to settle trade in Indian rupees.

Data show that the proportion of US dollar reserves and assets in global central banks’ foreign exchange reserves has dropped from 65.46% in the first quarter of 2016 to 59.79% in the third quarter of 2022.

Despite its declining status, the US dollar still accounts for the largest share of global trade settlement, central banks’ foreign exchange reserves, global debt pricing, and global capital flows. However, the abuse of the US dollar hegemony has led many countries to launch a “de-dollarisation” campaign. The more the US dollar is used as a weapon, the faster it will be abandoned by other countries.

It’s unrealistic that some in the United States want to safeguard the benefits brought by the US dollar as a leading international currency, but don’t want to shoulder corresponding international responsibilities. – China Daily/Asia News Network

 

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Yuan’s rising global influence

The currency’s correlation with an MSCI Inc index of its developing-nation peers rose to record in September on a weekly basis before edging back slightly amid the Omicron outbreak, Bloomberg data show.

` BEIJING: The Chinese yuan is having a greater impact on its emerging-market counterparts than ever before and may play a crucial role in determining their performance in the coming year.

` The currency’s correlation with an MSCI Inc index of its developing-nation peers rose to record in September on a weekly basis before edging back slightly amid the Omicron outbreak, Bloomberg data show.

` While the close relationship is partly a result of China’s large weighting, it’s also been driven by the yuan’s links to the Brazilian real reaching the strongest since at least 2008, and that with India’s rupee touching a three-year high.The yuan’s rising global influence is yet another sign of China’s deepening connections across the world economy.

` Investors are increasingly being drawn to its bonds as an alternative to United States Treasuries, while some banks are calling for the yuan to join the dollar, euro and yen as a global reserve currency.

` ADVERTISING Yet with China’s potential being offset by murky policy making and regulatory crackdowns, being tied too closely to the yuan may also backfire.

` “China is going to be a very important element of emerging-market stability and the growth picture,” said Magdalena Polan, principal economist at PGIM Ltd in London.

` “The willingness for Chinese policy makers to stabilise growth will be very important to the outlook for Latam and Asia and South Africa, as countries there still rely quite a lot on exports from China.”

` While correlations can be measured in many ways, China’s increasing presence in global trade has progressively boosted the yuan’s links with those of its emerging-market peers.

` In 2000, the average developing nation sent only 2.2% of its exports to China, while that proportion has now grown to 11.3%, according to data from Societe Generale SA.

` The investment bank says the yuan’s relative stability has traditionally made it most closely correlated with those of its emerging-market peers with strong and credible policy makers such as Mexico, Chile and South Korea.

` Since the US-China trade war in 2018, however, the yuan’s links with emerging markets as a whole have grown stronger, with the average correlation rising to 83% that year, according to SocGen data.

` There’s a risk of course that those very connections may also weigh on emerging-market currencies if the yuan begins to weaken. The major risk of that happening looks to be due to potential policy divergence, with the People’s Bank of China expected to ease monetary policy in 2022, just as central banks from the US, UK and Australia start to tighten.

` The yuan will face a particular challenge as the Federal Reserve beings to raise borrowing costs, a move that is anticipated to lead to a stronger dollar and outflows from emergin

`g markets. Still, China’s currency has so far shown itself to be relatively resilient to monetary policy at home and abroad. China’s economy has become an increasingly important influence on global growth over the past decade, and a vital one for emerging markets, according to JP Morgan Private Bank.

` “Since the financial crisis, we’ve had mini cycles in global emerging markets, largely coincident in China’s property and credit cycle and since the crisis that has been the key driver of the outlook in emerging markets for the most part,” said Alexander Wolf, head of investment strategy, Asia, at JP Morgan Private Bank in Hong Kong.

` The yuan’s relative resilience this year has also played a role in limiting fluctuations across emerging markets, in what has otherwise been a very tumultuous 12 months.

` “The fact that the yuan’s not doing too much I categorise it as a volatility suppressant,” said Paul Mackel, head of global foreign-exchange research at HSBC Holdings Plc in Hong Kong. “We believe that stability can last for longer.” — Bloomberg 

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China, Japan to launch yuan-yen direct trading

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Trade between Asia's two largest economies is about to get a whole lot easier. China's central bank confirmed Tuesday that the country will allow the direct trading of its currency against the Japanese yen starting Friday.



This makes the yen the first major currency besides the US dollar that can be directly traded with the RMB. The move is part of efforts made by China and Japan to strengthen cooperation in trade and financial markets. And it’s a huge step forward for the internationalization of the yuan.

After some excitement in the Asian markets yesterday. The People’s Bank of China confirmed on Tuesday that China and Japan will start to directly trade their currencies in Shanghai and Tokyo from June 1. The move will shore up trade and financial ties between Asia’s two biggest economies, and also marks another step to raise the yuan’s international role.

Japanese Finance Minister Jun Azumi, who announced the decision in Tokyo, stressed the cost benefits behind the move.

Azumi said, "By conducting transactions without using a third country’s currency, it will bring merits of reducing transaction costs and lowering risks involved in settlements at financial institutions. It will also contribute to improving convenience of both countries’ currencies and reinvigorate the Tokyo market."

The step eliminates the US dollar’s monopoly position to set the exchange rate between the two currencies, and follows a deal struck by the leaders of the two countries in December.

Experts say it’s an important move towards the internationalization of China’s yuan currency.

Professor Ding Zhijie, dean of School of Banking & Finance, UIBE, said, "It raises the convertibility of the yuan. And I believe the yuan trading will be accepted by more Asian economies as well as the international markets. It will also push forward the internationalization of the yuan."

Several banks in the two countries, including Bank of Tokyo-Mitsubishi UFJ and Bank of China, will start the direct trading.

Huang Jiaying, trade with Bank of China said, "The move will likely make the yuan accepted by more Japanese investors as well. It will also help boost the possibility of the yuan becoming an internationally-settled currency, which is an important move of propelling the yuan to become an international reserve currency."

And Japan, which in March pledged to buy about 10 billion US dollars of Chinese government debt, is the first economy to connect with China’s yuan. The move is likely to strengthen ties with its biggest
trading partner.

Japan, China to shore up yen/yuan trade

Japan and China will start trading their currencies directly in Tokyo and Shanghai from June 1 in a move that shores up trade and financial ties between Asia's two biggest economies and also marks another baby step to raise the yuan's international role.

The step eliminates the use of the dollar to set the exchange rate and follows an agreement struck by the leaders of the two countries in December, which also involves Japan buying Chinese government debt and efforts to forge a free trade pact between China, Japan and South Korea.

"This is part of China's broader strategy to reduce dependence on the dollar. The yen has been chosen because of large trade flows between the two countries," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

"Volumes of currency trading on shore are small, but this could lead to an expansion of trading with other currencies. It would be easier for China to expand into other Asian currencies."

Japanese Finance Minister Jun Azumi, who announced the decision in Tokyo, stressed the cost benefits of the move.

"By conducting transactions without using the third country's currency, it will bring merits of reducing transaction costs and lowering risks involved in settlements at financial institutions," Azumi told reporters after a cabinet meeting.

The People's Bank of China noted benefits for mutual trade, but also tied the decision to China's drive to boost the use of the yuan as a settlement currency for trade and financial transactions.

"Developing the direct yuan/yen trading will help form the direct yuan/yen exchange rate and reduce the trading cost for entities and promote the use of the yuan and yen in bilateral trade and investment as well as help strengthen financial cooperation between the two countries," it said in a statement.

A separate statement issued by the China Foreign Exchange Trade System said it will provide a market-making system for direct yuan/yen trading.

Until now yen-yuan rates were calculated on the basis of their respective rates against the dollar, so the move is expected to narrow trading spreads, lower transaction costs and allow more trade deals to be settled directly.

For Japan, which in March pledged to buy about $10 billion of Chinese government debt, becoming the first major economy to do so, the move could strengthen ties with its biggest trading partner.

Despite sometimes rancorous political ties between the two neighbours, Japan's economic fortunes are increasingly tied to China's economic growth and consumer demand.

Dealers in Shanghai said the near-term effect would be probably higher trading volumes and lower costs.

"Direct yuan-yen trading is likely to cut trading costs, boosting yuan-yen trading liquidity," said a dealer at a foreign bank. "Most yuan trading against the yen now goes through the dollar, because traders refer to dollar-yuan value to price yen-yuan."

But some played down the broader impact.

"From what I can see, it doesn't actually include any opening up of the capital account at all. It just allows a direct cross to be traded rather than actually increasing the amount of flow that can happen onshore to offshore," Dominic Bunning, currency strategist at HSCB in Hong Kong, said.

"It seems to be more of a technical issue rather than a major development."

The move to facilitate yen-yuan trading and the debt deal are part of Beijing's long-term efforts to elevate the yuan's status as an international currency, which so far have mainly centred on China's promotion of the yuan to settle trade.

Beijing has struck agreements with several nations from Malaysia to Belarus and Argentina on the use of the yuan in trade and other transactions. It has expanded a pilot programme started in 2009 into a nationwide one allowing firms to settle their trade in yuan.

The result has been a relative surge in the use of the currency. More than 9%of China's total trade was settled in yuan in 2011, up from just 0.7% in 2010.

Few argue against the idea that the yuan will one day become a reserve currency, given World Bank predictions that China will overtake the United States as the world's top economy before 2030. But to achieve that the yuan would need to become fully convertible and Beijing has yet to indicate any timetable for reaching that stage.- Reuters

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• Demise of US dollar as world currency
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Demise of US dollar as world currency

Experts see demise of dollar as world currency

 By DORIS C DUMLAO and MICHELLE V. REMO

IT may only be a matter of time before the US dollar gets replaced as the main currency in international trade, according to economists attending the meeting of the board of governors of the Asian Development Bank (ADB) in Manila.

Asian Development Bank, ADB

For many years, the dollar “has been almost the sole ‘reserve’ currency,” banked on by the world economy, American economist Jeffrey Sachs said on Thursday in one of the forums held during the ADB annual event. “Going forward, (the dollar) can’t play that role anymore.”

Sachs added that he could not see how the US dollar could remain as the world’s reserve currency when “the role of the United States in the global economy is diminishing.”

Several finance experts echoed Sachs’ sentiment, explaining that, with the greenback expected to weaken further, the world should turn to another currency to facilitate international trade and other commercial transactions.

“Having another reserve currency other than the US dollar is only a matter of time. We don’t know exactly when it will happen, but it will,” Neeraj Swaroop of Standard Chartered Bank said in an interview at the sidelines of the ADB meeting.

In the area of merchandise trading, Swaroop said, countries have actually started to use currencies other than the US dollar.

Sachs also said that some countries could turn to more than one currency in maintaining their foreign exchange reserves.

One currency being considered is the Chinese renminbi (RMB) which, according to HSBC, will inevitably become an international reserve currency.

The renminbi, or yuan, has the potential to become an international reserve currency because China is continuing to post strong growth, becoming an important player in the global economy, Iwan Azis, ADB head for regional integration, said in the same forum.

Also, China is pushing to make the yuan the world’s reserve currency – a move that is seen to hasten the replacement of the US dollar, Azis added.

Already, British banking giant HSBC has mapped out a strategy to be a leading global player in the “renminbi banking” space.

This global strategy has filtered into the Philippine market with the bank’s introduction of RMB-denominated deposit and trade financing facilities, top HSBC officials said in a press briefing on Thursday.

Spencer Lake of HSBC said the renminbi was increasingly becoming an important currency from a trade perspective.

Lake was in Manila as head of the HSBC delegation to the ADB event.

“If it were freely convertible today, it will be the second-largest currency in the world,” Lake said, noting that China has started to liberalise currency systems.

“It’s part of our core strategy to adopt and put in place all of the infrastructure and products to embrace (the renminbi) as a future reserve currency,” Lake said.

Lake said the bank’s strategy appeared to be gaining ground as indicated by a “significant” buildup of the RMB business in Hong Kong, Singapore and other South-East Asian countries.

“The world is getting ready to adopt it as a world currency,” he said. “You’ll see it as a more common language.”

“Reserve” currency, which is currently used to describe the US dollar, is the denomination that accounts for bulk of the foreign exchange reserves of most countries.

A country taps its foreign exchange reserves whenever it needs to pay off the costs of imported products and debts to foreign creditors.

After the United States fell into a recession in 2009, the US dollar began to weaken against emerging market currencies.

The trouble with hanging on to the dollar as the main reserve currency is that it is prone to depreciation given the prevailing economic troubles of the United States.

Depreciation of the US dollar, in turn, may lead to a reduction in the value of a country’s foreign reserves, experts said.

Apart from the yuan, Sachs said other viable currencies that could replace the US dollar were the euro and the Japanese yen. — Philippine Daily Inquirer / Asia News Network   

Changing the international monetary system

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THINK ASIAN By ANDREW SHENG

ON Oct 5, 2011, the Triffin International Conference celebrated the 100th year of birth of Robert Triffin, a Belgian economist who was trained in Harvard, worked in the US Fed, taught in Yale and then returned to Europe to help work on European monetary integration.

He was of course famous for the Triffin Dilemma, defined as the inconsistency between the domestic needs of the reserve currency country and the external needs of the world that uses the reserve currency. Put in another way, Triffin identified that the reserve currency country would have to run a current account deficit in order to provide the world with greater liquidity.

Over the long term, running cumulative current account deficits becomes a large debt overhang that is called the Global Imbalance.

Triffin wrote about the Dilemma in the late 1960s, when the United States was struggling whether to maintain its peg to gold, which it abandoned in 1971. This removed the anchor of the Bretton Woods system of fixed exchange rates, which had been in existence since 1947.

The succeeding Bretton Woods II, or non-system as some critics call it, has become a system of flexible exchange rates, plagued by financial crises every decade in the 1980s (Latin America), 1990s (Mexico and East Asia), 2007-9 (US subprime) and today, the European debt crisis.

Today, there is sufficient awareness that the shift from a unipolar world to a multipolar global financial system carries with it great risks and unknowns. The unipolar world of dominance by the US dollar had a lot of advantages, as long as the US remained the unchallenged hegemonic power. The US dollar became not only the standard unit of account for global trade, but also the deepest and most liquid market and an important store of value.

The price of oil, gold and other important commodities are all measured in US dollars. The US Treasuries market is the most liquid and efficient clearing system, which is one fundamental reason why the dollar remains superior to the euro, which does not have a single eurobond market, being divided into different national (German, French, etc) bond markets.



According to the BIS (Bank for International Settlements) April 2010 survey data, the US dollar today still accounts for 85% of global foreign exchange trading, compared with 39% for the euro, 19% for yen and 13% for sterling (because FX transactions are paired, total turnover sums up to 200%). By contrast, the Hong Kong dollar accounts for only 2.4% and the yuan 0.9% of turnover.

Because of its dominance in international trade and payments, the US dollar still accounts for nearly two thirds of total foreign exchange reserves. China alone reputedly holds roughly US$2 trillion in US dollar assets in the foreign exchange reserves and holdings by Chinese banks and state-owned enterprises.

In 2009, People's Bank of China Governor Zhou Xiaochuan called for the use of the SDRs (International Monetary Fund's Special Drawing Rights) as a possible global reserve currency. The logic for a globally issued reserve currency as opposed to a nationally issued reserve currency is impeccable. Nationally issued reserve currencies are subject to the Triffin Dilemma, because countries, however strong, will sooner or later go into deficit.

In other words, the whole global financial system is stable when the national reserve currency country is strong, but it will go into crisis, when the national reserve currency country goes into crisis. This is the current state of affairs.

The four reserve currency countries (US, euro area, Britain and Japan) accounting for just under 60% of world GDP are all in deep trouble. The US is running a current account deficit in excess of 3% of GDP and a fiscal deficit over 9% of GDP in 2011. At the end of 2010, the US had a gross foreign liability of US$22.8 trillion or 157% of GDP. Thank goodness that most of the debt is in US dollars, so that it can devalue its way out of debt.

The euro area as a whole has a smaller current account deficit of 0.5% of GDP, but if you look deeper, there are deep imbalances within the eurozone. Germany, the Netherlands and a few are in surplus, whereas the smaller countries like Greece, Portugal, Ireland and Spain all have net foreign liabilities exceeding 50% of GDP, an indicator of crisis using the Asian crisis experience as rule of thumb.

Britain has a fiscal deficit of 8.8% of GDP and gross debt of 81% of GDP. Its one advantage relative to the Euro is that it can devalue its way out of debt.

Japan, on the other hand, has a net foreign surplus of 50% of GDP, being a major net lender to the rest of world, since it runs a current account surplus of 2.3% of GDP. Its vulnerability is, however, its large domestic gross debt of 220% of GDP, growing larger every year with fiscal current account deficit of 8.3% of GDP in 2011. This means that the domestic debt is vulnerable to bubble implosion, because if interest rate rises, the debt becomes unsustainable.

In sum, the reserve currency countries are in a double trap. They have to run loose monetary policy to keep interest rates low, so that their fiscal debt will not run out of control. But their central banks also know that exceptionally low interest rates are distorting not only global financial markets, they also have very distortive impact on their domestic resource allocation.

This is the liquidity debt trap that Japan got into in 1990 when its asset market bubble burst following the sharp rise in the yen exchange rate. Japanese GDP growth never fully recovered after that. Reserve country status has not been a privilege, but a curse.

The emerging markets are struggling because the present international monetary system has become unstable and unsustainable. How should this essentially unipolar system be reformed to a multi-polar system where yuan plays a role will be the subject of the next column.

l Tan Sri Andrew Sheng is president of the Fung Global Institute.

US Dollar’s Share Of Global Reserves Continues To Slide, Reserve Status Questioned

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Dollar’s Share Of Global Reserves Continues To Slide, Reserve Status Questioned

 Timmy Geithner and Bennie Bernanke have contributed to the dollar's decline - Getty Images North America.

WASHINGTON - APRIL 21: Treasury Secretary Timothy Geithner (L) and Federal Reserve Chairman Ben Bernanke applaud during the unveiling of the new $100 note in the Cash Room at the Treasury Department April 21, 2010 in Washington, DC. According to the Treasury Department, the U.S. government evaluates advances in digital and printing technology to redesign currency and stay ahead of counterfeiters. The new note will be put into circulation in Feburary 2011.

Further confirmation that the U.S. dollar is gradually losing its reserve status came today from an International Monetary Fund report on global holdings of foreign exchange reserves by central banks.  The greenback, and the euro, lost share vis-à-vis the Japanese yen, the Australian, and the Canadian dollar, pointing to a “slow, gradual diversification” of reserve holdings.

With Christine Lagarde recently appointed General Manager in replacement of the disgraced Dominique Strauss-Kahn, the IMF released its latest “Composition of Official Foreign Exchange Reserves” (COMFER) which lists reserves held at central banks in 33 “advanced economies” and 105 “emerging and developing economies.”  China, one of the largest holders of foreign reserves, is not included in the sample. (Read IMF Appoints Lagarde To Fix A Disgraced institution).

Attesting to the continued global loss of confidence in the U.S. dollar, the greenback’s share of the world’s reserve continued to slide in the fourth quarter of 2010, the latest data show.  Interestingly, the trend can be explained entirely by valuation effects, with the trade-weighted dollar depreciating 4%% in that time frame.

The U.S.’ share of allocated reserves fell in the first quarter to 60.69%% from 61.53% from Q4 2010.  Central Bank reserves move slowly, but the slide in the greenback’s share, which Nomura suggests would be even steeper if China was included in the sample, has been very pronounced if one takes a longer-term window.



A year before the latest data, Q1 2010, the greenback’s share stood at 61.64%, while in Q1 2001, ten years before, it stood at 72.3%.  While USDs dominance was unquestioned a few years ago, it is anything but rare to speak of a move toward a multi-currency system, with the dollar still a primus inter pares [first among peers]. (Read Central Banks Dump Treasuries As Dollar’s Reserve Currency Status Fades).

Emerging and developing nations aggressively accumulated foreign reserves in the first quarter, as their high-growth economies attracted massive capital flows from so-called advanced economies.  While rich nations added $65.5 billion in reserves, $1.6 billion of those in U.S. dollars, emerging markets added $366.3 billion, $65.8 billion of those in dollars.  Regardless, EM central banks also sought further diversification, with the Japanese Yen as the main destination.

Emerging market central banks accumulated $6.6 billion in new JPY reserves in the first quarter, taking their allocation up to 2.9%.  “While the increase appears small, it signifies that the yen has recently found favor amongst EM central banks as an alternative safe haven,” noted Nomura.

“Other” currencies, as denominated by the IMF, made up 20% of emerging market reserve accumulation in the first quarter.  With the Canadian and Australian dollars as some of the biggest beneficiaries, the share of “other” currencies climbed up to 5.8%, from 5.1% in Q4 2010.

Euro share of global reserves crawled up a couple of percentage points to 26.6%, despite being shunned by EM central banks (where its share fell to 28.2%).  With the euro gaining 5.8% against the dollar in the first quarter, the data indicates EM’s actively selling euros.  “It is likely that central banks sought to rebalance their reserve portfolios in the wake of EUR strength and corresponding USD weakness. That is, they sold EUR and bought USD and other currencies to counter the sharp change in valuation,” explained Nomura’s analysts.

The IMF’s most recent COFER continues to support the thesis that the U.S. is losing its reserve status.  Central banks are sticking to “relatively stable allocations of major currencies,” namely the U.S. dollar and the euro, yet they are gradually moving away, adding yen and “other” currencies.  While the greenback will continue to play a predominant role in world trade, there can be no doubt that slowly, but surely, central banks will rely less and less on it.