Could the Chinese yuan dislodge the US dollar as a reserve currency? – Natixis
|The future of the dollar as reserve currency has long been discussed, but never as much as recently. There are a number of domestic and external reasons for this. Among the former, the most obvious risk is debt sustainability, especially after the huge COVID-related fiscal and monetary stimuli. Given the large share of US debt in the hands of foreign investors, the risk of a sell-off has direct implications on the dollar reserve currency status, as reported by Natixis.
The risks to the US dollar
“The dollar remains the world’s largest reserve currency, but it is facing both domestic and external risks. The domestic risk is really about the need to finance a huge debt fed by monetary and fiscal stimuli, particularly after COVID-19. The jury is still out as to whether the U.S. will remain productive enough, and thus grow enough, to repay the debt.”
“On the external front, it is really all about China and its quest to elevate the RMB to the podium of reserve currencies but also to bypass the dollar. To that end, the current plan is to step up the cross-border use of China’s digital currency, but it is easier said than done.”
“China’s huge economic size will help, but as long as the currency is not fully convertible, it will take time for the currency to be fully accepted beyond its borders.”
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