Editorial | Yuan’s rise will make only a small dent in might of US dollar

The demise of the United States dollar as the world’s leading reserve and trade currency is greatly exaggerated. Its dominant status, unchallenged since the end of the second world war, is unlikely to end any time soon. But there is no denying that changes in the world’s financial architecture and trading patterns are afoot. All these will pose significant challenges to the once-almighty greenback in the years and decades ahead. Following in the footsteps of Russia and Iran, Brazil has reached a yuan-based trade deal with China that will allow its exporters to be paid in the Chinese currency. The payment arrangement will especially facilitate the country’s major exports to China such as iron ore, soybeans and beef. Trade settlement in yuan will increasingly be the norm among the BRICS bloc of Brazil, China, Russia, India and South Africa.

Last month, France’s TotalEnergies completed its first deal in yuan with the state-owned China National Offshore Oil Corporation (CNOOC) involving 65,000 tons of liquefied natural gas (LNG) from the United Arab Emirates. Riyadh and Beijing are working out yuan payments for oil. And, thanks to Western sanctions, the yuan has replaced the US dollar as the most traded currency in Russia.

The so-called de-dollarisation is often explained in geopolitical terms, as those countries facing rising tensions with the US and the West want to seek out alternative payment systems and assets to escape the threat of US sanctions and economic warfare. But much of it is also basic economics. The US dollar has risen by about 15 per cent to a two-decade high against major currencies. All Asian currencies have fallen vis-à-vis the greenback, with the yen dropping by 20 per cent since the start of 2022, while the yuan weakened by 8 per cent. That has made dollar-denominated trade unnecessarily expensive, leading many governments to realise that the use of the greenback is counterproductive under such conditions.

It’s no accident that member states of the Association of Southeast Asian Nations (Asean), which have maintained good relations with the US, have been building up bilateral currency swaps with China to promote the use of local currencies in regional trade and investment. That is an entirely natural economic outcome of the increasingly close interdependence of their rising economies.

The yuan will not be supplanting the US dollar any time soon. However, as the current cycle of rate increases continues to buoy the dollar’s value, more countries will be forced to move away from US dollar-denominated trade to look for more economical currencies for settlement. Given the significance of China as the major trading partner to a majority of countries around the world, the yuan, despite its many limitations, will be increasingly important in bilateral trade.