Replacing USD as the world's reserve currency with Renminbi lacks any economic substance – Commerzbank

FXStreet Insights Team FXStreet

The BRICS summit starts today in South Africa. The BRICS could announce that they will no longer use the USD as a trading currency among themselves. Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, analyzes what implies replacing USD with the Renminbi.

China does not seem to be able to run large current account deficits on a sustained basis

Does the US run a current account deficit because it enjoys the ‘exorbitant privilege’ of being the world's reserve currency? Or does the USD work so well as the world's reserve currency because the US is the only economy in the world that can afford to run such a large current account deficit for such a long period of time to meet the growing demand for the world's reserve currency? And without sliding into a current account crisis? I am a firm believer in the second view. But the other side should at least admit that no other sufficiently large economy seems to be able to run large current account deficits on a sustained basis. Certainly not China.

Talk of replacing the US Dollar as the world's reserve currency with the Renminbi lacks any economic substance. Either it is just talk, with nothing material to follow, or it will end in disaster.

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