It seems like China is eyeing to erode the dominant position of the US dollar. Even though there are signs that the USD would soon lose its role as the global reserve currency, more and more central banks are looking closely at the yuan.
According to the annual poll by UBS Asset Management, 85% of central banks are investing or looking to invest in the Chinese yuan. In 2021, the figure stood at 81% of the 30 leading central banks polled by UBS.
On average, central banks expect to hold around 5.8% of their reserves in yuans in the next 10 years. This would be a major increase compared to the 2.9% of the global reserves held in RMB, as reported by the IMF in June 2022.
Meanwhile, the share of the global reserves held in USD has gone down from 69% in 2021 to 63% in June 2022. According to the Business Insider, the crisis in Ukraine has triggered more talk about a possible multipolar world where the US wouldn't be the single dominant power.
Some have suggested that the fact that the USD is used to punish Russia for the conflict in Ukraine has convinced some countries that they should be less dependent on the dollar. This, in turn, means being less vulnerable to the US diplomatic and economic pressure.
The trust in the US dollar began to erode long before the events in Ukraine. In response to the Covid pandemic, the Fed published trillions of dollars out of thin air. This hurt the dollar's purchasing power, as shown by the high inflation in the US.
This was a predictable result of creating money out of nothing and distributing it across the economy. When more money is available to spend on the same amount of goods and services (or when the government restricts the economy), prices always rise.
The only reason why the US can get away with this policy is the dollar's position as the global reserve currency. The demand for dollars is built into the global economy, and this helps to absorb a lot of the newly-printed money. But what will happen if this demand falls? What will happen when China and other countries decide that they don't want to hold a currency that keeps losing its value? We suggest you think of an answer yourself.
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