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Tag Archives: USD

G10 Currency (Percentage Change) vs. USD since June 1, 2021

Source : Bloomberg and Trading Economics

Is the Chinese Yuan Beginning to Chip Away at Dollar Dominance?

China appears to be chipping away at dollar dominance.

While there is no indication that the dollar is in imminent danger of toppling from its perch as the global reserve currency, more central banks are warming up to the yuan.

According to UBS Asset Management’s annual reserve manager survey, about 85% of central banks said they are invested in or are considering investing in the Chinese yuan. That’s up from 81% a year earlier.

USB surveyed 30 top central banks.

On average, central bank foreign exchange managers plan to hold about 5.8% of reserves in yuan within the next 10 years. That would represent a sharp increase from the 2.9% level of global reserve yuan holdings reported by the International Monetary Fund in late June.

Meanwhile, the average share of US dollar holdings dropped to 63% as of June 2022, according to the survey. That was down from 69% in the previous year.

According to Business Insider, the response to the invasion of Ukraine “has increased talk about a ‘multipolar’ world, in which the US is no longer the overwhelmingly dominant force.

There is some speculation that the weaponization of the dollar to punish Russia for the invasion of Ukraine has motivated some countries to diversify away from the dollar. Less exposure to the greenback means less exposure to diplomatic and economic pressure from Washington DC.

Declining confidence in the dollar started long before recent events in Ukraine. The Federal Reserve printed trillions of dollars out of thin air in response to COVID-19. This devalued the dollar as evidenced by the surge in prices over the last year. This was the predictable result of creating money out of thin air and handing it out to spend. More money chasing the same amount (or with governments shutting down economies fewer) goods and services will always lead to a general rise in prices.

The only reason the US can get away with this policy to the extent that it does is its role as the world reserve currency. There is a built-in global demand for dollars that helps absorb the money printing. But what happens if that demand drops? What happens if China and other countries decide they don’t want to hold a currency that is losing value every day?

After Russia invaded Ukraine, the US cut some Russian banks, including the central bank, off from the SWIFT payment system.

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. The system enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar serves as the world reserve currency, SWIFT facilitates the international dollar system.

SWIFT and dollar dominance gives the US a great deal of leverage over other countries.

And the US went a step further. In an unprecedented move, the Federal Reserve froze Russia’s dollar reserves. In effect, Russia’s dollar assets are valueless to the country. It can’t use them at all.

Even if you think Russia deserves these draconian economic sanctions, it’s important to remember that they could come at a cost.

Recent dollar strength compared to other world currencies suggests that the dollar remains in a strong position. But things could shift quickly. How much more borrowing and printing will the world tolerate before they become wary of holding dollars? And will the US propensity to use the dollar as a foreign policy weapon undermine trust in the greenback?

The world is watching.

Source : Schiff Gold

Charts: The Euro Weakened Below US$1.02, the Lowest Level in 20 Years

Source : Trading Economics

Chart: The Dollar Index Climbed Above 105

Its strongest level in almost 20 years.

Source : Bloomberg

Hong Kong Should Stick to US Dollar Currency Peg, HKMA former CEO Says

Enoch Yiu wrote . . . . . . . . .

Hong Kong should stick to its almost four-decade-old currency peg with the US dollar, as it is the best option for the city in the challenging times ahead, says the peg’s founder and the city’s longest-serving central banker.

Joseph Yam Chi-kwong, the first CEO of Hong Kong’s de facto central bank, the Hong Kong Monetary Authority (HKMA), from its establishment in 1993 until 2009, set the currency peg fixing the Hong Kong dollar at 7.8 per US dollar in 1983. It has been allowed to trade between 7.75 and 7.85 per US dollar since 2005, with the HKMA intervening in the market if it trades beyond this band.

Currently, a member of outgoing leader Carrie Lam Cheng Yuet-ngor’s cabinet, Yam rejected calls for change, including pegging the Hong Kong dollar to the yuan.

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“It looks like Hong Kong is going into a period that will present unusual challenges to the stability and integrity of our monetary and financial systems, and to our status as an international financial centre,” Yam said in an interview with the South China Morning Post.

“The [current] system continues to be most suitable for Hong Kong, as we brace ourselves for meeting the possible challenges ahead. Keeping a system that has proven to be most resilient is our best option,” he said.

There have been calls for a review of the peg recently, because of interest rate increases in the United States since March, with the next one due on June 16. The US Federal Reserve has signalled 10 ­increments in US interest rates until the end of next year, which Hong Kong will need to follow because of the currency peg, even though it is facing economic downturn and high unemployment.

The challenges Hong Kong faces include, along with the ongoing coronavirus pandemic: inflation across the globe; withdrawal of stimulus measures in the US and the West; and geopolitical tensions between China and the US, with America showing a tendency to weaponise finance. There is a fear that Washington might introduce sanctions and ban Hong Kong from accessing the US dollar to break the peg.

Yam said he did not believe this would happen. “I just cannot see why the US would want to impose on Hong Kong the type of financial sanctions now being applied to Russia. These are nuclear options,” he added.

The US would not want to “destroy or damage” Hong Kong, which is one of the most active US dollar trading centres in the world and a gateway between the US and China, he said. “Imagine also the repercussions such a nuclear option might have on sentiment in global financial markets, and on the status of the US dollar,” he added.

As far as linking the local currency to the yuan was concerned, Yam said this “should only be considered as one of many contingency options, if there is a nuclear war in finance”. Switching the peg to the Chinese currency will require handling a lot of technical issues and “this will not happen any time soon”.

“If we are forced to change the currency anchor link from the US dollar to another currency, it means the Exchange Fund will need to switch about US$300 billion worth of liquid US dollar assets [that are currently] giving full backing to the Hong Kong dollar monetary base into assets in the new anchor currency. Let me tell you – this is not a simple matter,” Yam said.

The city could, however, do more to help internationalise the yuan further, he said, as China would like to reduce its dependence on the US dollar in its international economic and financial activity.

“The offshore yuan market in Hong Kong has an increasingly important role to play in the years ahead,” Yam said, adding that the yuan could be used along with the Hong Kong dollar for stock market pricing and settlement, which would be a “wise and strategic move”.

On the subject of whether the Hong Kong dollar would continue to exist as a stand-alone currency in 2047, 50 years after Hong Kong’s handover to China, Yam said: “Why not?”

President Xi Jinping said in 2018 that the world was undergoing a change not seen in a century, with the rise of China and the West developing strategies to contain it. Such a change will present new challenges and opportunities for Hong Kong, Yam said.

“To continue to play an essential role as the preferred intermediary, particularly when global financial markets are poised for directional shifts and volatility, I see no better alternative than to keep the peg in place,” he said.

Source : Yahoo!

IMF Lifts Weighting of Dollar, Chinese Yuan in SDR Basket

The International Monetary Fund said on Saturday it has increased the weighting of the dollar and Chinese yuan in its review of the currencies that make up the valuation of its Special Drawing Rights (SDR), an international reserve asset.

The review is the first since the yuan, also known as the renminbi, joined the basket of currencies in 2016 in what was a milestone in Beijing’s efforts to internationalise its currency.

The IMF raised the U.S. currency’s weighting to 43.38 per cent from 41.73 per cent and the yuan to 12.28 per cent from 10.92 per cent. The euro’s weighting declined to 29.31 per cent from 30.93 per cent, the yen’s fell to 7.59 per cent from 8.33 per cent and the British pound fell to 7.44 per cent from 8.09 per cent.

The IMF said in a statement its executive board had determined the weighting based on trade and financial market developments from 2017 to 2021.

“Directors concurred that neither the COVID-19 pandemic nor advances in Fintech have had any major impact on the relative role of currencies in the SDR basket so far,” the IMF said.

Although the yuan’s value has declined recently, it has risen roughly 2 per cent against the dollar since 2016, and appreciated about 6 per cent against its major trading partners.

In a statement on Sunday, the People’s Bank of China said China will continue to promote the reform and opening of its financial market.

The updated weightings take effect on Aug. 1.

Source : CNA

The SDR interest rate (SDRi)

The SDRi provides the basis for calculating the interest rate charged to members on their non-concessional borrowing from the IMF and is paid to members for their remunerated creditor positions in the IMF. It is also the interest paid to members on their SDR holdings and charged on their SDR allocations.

Source : IMF

Charts: The U.S Dollar Index Broke Above the 102 Mark for the First Time Since March 2020

Source : Trading Economics

Charts: The Stealth Erosion of U.S. Dollar Dominance as Reserve Currency

Global holdings of nontraditional reserve currencies have risen from negligible levels (about US$30 billion in 1999) to US$1.2 trillion in the last two decades

Source : IMF

Charts: Russian Ruble Continues to Drop Against US$

Russian Ruble reached 85.97 in January of 2016

Source : Trading Economics

Chart: Euro Challenges U.S. Dollar as Global Currency

Source : Statista