Will the dollar be dethroned by the yuan? Not in the near term

Recent events suggest several major developing economies are eager to move away from the US dollar, but evidence of a widespread shift is lacking

If the US dollar is going to be dethroned, it will be because America falls behind in economic heft and competitiveness, not by geopolitical manoeuvring

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China has made several recent efforts to promote the yuan and encourage other economies to move away from the US dollar, but large-scale global de-dollarisation does not appear to be happening. Photo: Reuters

David Chao

David Chao is a global market strategist (Asia Pacific) at Invesco.

Published: 12:30am, 23 May 2023Updated: 1:00am, 23 May 2023

The strength of the US dollar has been a key theme in global markets since the US Federal Reserve began raising interest rates last year. Despite the Fed’s conditional interest rate pause in May and possible cuts later this year, the dollar remains expensive, especially when compared to the yuan, which recently moved past the psychologically significant exchange rate of seven to one US dollar.

This could partially explain the notably vocal debate by economists and market participants on “de-dollarisation”, the gradual unwinding of US dollar dominance in global trade and finance and the move towards a broader diversity of currencies. Past iterations of this debate focused on the Japanese yen and the euro, but now the yuan is the clear challenger.

Past challengers to global dollar dominance are worthy of analysis since neither the yen nor the euro managed to dethrone the US dollar, primarily because of the US outcompeting both economies from a macro perspective.

Japan’s economy seemed unstoppable in the 1980s. The country had rapidly closed its technology and productivity gap with the US, becoming the world’s second-largest economy. However, it never fully recovered from the bubble economy popping in 1991 as Japan’s population was ageing and shrinking.