See the latest Australian dollar analysis here:
Global currencies are widely used in cross-border monetary operations, finance and trade. For the issuing sovereigns, these currencies come with both benefits and costs and can therefore have significant implications for creditworthiness. In this report, we explore the drivers of global currency status and the prospects for change in the international monetary system, specifically, whether the dominance of the US dollar can be challenged by a rise of the euro and the renminbi.
Global currency status can be gained or lost, most recently in the aftermath of World War II, when the US dollar overtook the British pound as the world’s leading currency. Now, the dominance of the dollar is being tested, with China’s rising economic and political clout and Europe renewing its efforts to strengthen the euro’s global role.
But what could drive a systemic change in the international monetary system?
To answer this question, we examine the various dimensions of the uses of major global currencies by central banks and private investors. Crucially, our analysis focuses on the dollar and its two credible long-term challengers, the euro and the renminbi. Any change in the role of international currencies will be driven by i) policymakers shaping the international monetary system; ii) private actors reacting to those changes; and, crucially, iii) central banks, which play a dual role as both the shapers and users of the system.
Increased liquidity, safety and availability of EUR/ RMB assets Loss of confidence in USD Our findings highlight the following key takeaways:
➢ The liquidity, safety and availability of underlying assets, together with confidence in the currency’s value (underpinned by macroeconomic and political stability), are key to the widespread adoption of currencies by public and private actors.
➢ Considerable synergies between the various functions of money result in inertia, which has a dual effect: First, the dominance of the US dollar will persist until EU and Chinese governments implement policies that support the international use of their respective currencies. Once they do, switching from the US dollar to the euro or renminbi may take place more precipitously than currently thought possible.
➢ For European authorities, completing the Capital Markets and Banking Unions (CM and BU) would greatly increase the attractiveness of euro-denominated assets, the availability of which would also benefit from the creation of a euro area safe asset.
➢ For Chinese authorities, the further opening of capital accounts to foreign investors, progress in enhancing the supervision and reduction of financial system vulnerabilities, a strengthening of the rule of law and improved sovereign creditworthiness will be key to raising the renminbi’s international appeal.
➢ US foreign and trade policies may incentivise governments to reduce their reliance on the US dollar while persistent fiscal and current account deficits in a highly politically polarised environment may gradually weaken investor’s confidence in the currency.
And the world will be made of cheese:
- EZ is still far away from fiscal union. Brexit has happened. Italy is next.
- If China liberalises the trade account, CNY crashes and it plunges into financial crisis. Sure it could happen but China gets a lot poorer and the CCP is in jeopardy as a result meaning it won’t.
USD is going nowhere fast.