Is Currency Swap a Threat to U.S Dollars

The moves taken by some central banks in Europe to replace united state dollars with Chinese yuan is a strategy worthy of interest to financial experts and an issue of concern to many economies. India and some African nations are embracing the currency swap option in the business or financial deal. this trend poses the question to economic experts and institutions who share their view on the unfolding of a new dawn. President of the people’s republic of China Xi Jinping was reported by BBC to have said, it was time for the nation to “take center stage in the world’’ There are many ways for China to do this, including promoting globalization,  increasing foreign, and developing advanced technologies. Another critical step in taking “center stage” is to be at the center of the global economy. To achieve this, China is, among other things, trying to internationalize its currency.

For the past 70 years, the US dollar has been the world’s dominant currency. Two-thirds of the world’s $6.9 trillion allocated foreign exchange reserves are held in US dollars. The yuan took a major step towards broader international adoption in 2016 when the IMF decided to add the yuan to the currency basket that constitutes the Special drawing right, an alternative reserve asset to the dollar.

Still, as of the third quarter of 2017, just over 1% of foreign exchange reserves were held in yuan,(source IMF). Now, there are signs that this is about to increase. The share allocation for foreign exchange reserves for the third quarter was as follows U.S dollar63.5%, the euro holds 20.4%, the Japanese yen takes 4.5%, the British pounds 4.5%, Canadian dollar 2%, the Australian dollar 1.8%, Chinese yuan 1.1%, the Swiss franc 0.2%.,

The Chinese yuan hit a two-year high against the US dollar this week after the German Bundesbank said that it would include the yuan in its reserves for the first time. “The notable development from the European point of view over the past few years has been the growing international role of the renminbi in global financial markets,” Andreas Dombret, a member of the central bank’s executive board, was quoted to have said during a conference in Hong Kong (paywall). The decision was made last year and no investments have been made yet, as preparations are still in process. The French central bank then revealed that it already held some currency reserves in yuan

Since most central banks’ reserves are held in dollars, any shift into other currencies, such as the yuan, will come at the expense of the greenback. In June, the European Central Bank announced that it had a sum of 5o0 million euros which is equivalent to (610 million U.S dollars) worth of united states dollars reserves into the yuan securities. This was a small shift—the ECB has €44 billion in foreign exchange reserves—never the less it reflects China’s growing prominence in the global financial system.

As Trump’s “America First” policies push the US out of the international limelight, more people expect China to fill the gap, including in world finance. Barry Eichengreen, an economics professor at the University of California, Berkeley, an expert in global currency systems, predicts that the US dollar will eventually lose its dominance and multiple currencies will coexist on a more equal footing in international markets. In the future, the dollar will be forced to share prominence with the yuan and the euro, in particular, he says.

China still faces several hurdles in having a truly international currency. Capital controls and a lack of regulatory transparency make financial institutions reluctant to invest in Chinese assets. However, last week China showed signs that it was beginning to ease some of its rules used in controlling the currency. As the yuan gains more international relevance and value, Beijing might be emboldened to open up further, venturing into other climes of business partnership and global deals that would further strengthen her position as a global player an emerging economic power in the world of business.