De-dollarization | Jun 6, 2024

Image: Unsplash/Piotr Cichosz

Global central banks are currently supporting the US dollar and gold, going against the trend of de-dollarization

Surprisingly, central banks throughout the world are becoming less supportive of the Chinese yuan and more in favour of the US dollar and gold, as reported by Reuters. The current de-dollarization narrative and the BRICS countries’ attempts to reduce their reliance on the dollar are at odds with the news. This preference is due to a variety of factors, including geopolitical risks, concerns about market transparency, and a long-standing belief in the stability of the US dollar.

See:  Credit Suisse: Statecraft and De-dollarization

Nikhil Sanghani, OMFIF Economic and Monetary Policy Institute Managing Director:

“This is the first year we’ve seen any meaningful share of reserve managers looking to downscale their renminbi holdings.  Lots (of managers) flagged market transparency and geopolitics as some hurdles, and, at least in the near term, quite a few mentioned that it’s simply a returns point – policy rates are low in China and you can earn higher yields in U.S. or European government bonds now.”

The Dominance of the US Dollar in International Trade

In spite of continuous efforts to de-dollarize, the US dollar continues to be essential to international trade and banking. Because of the stability of the market and better rates, central banks are keeping adding dollars to their holdings. Reserve managers find the 4.5% yields on U.S. Treasuries to be more appealing than the 2.3% yield on Chinese bonds. The safety and liquidity of US government bonds also contribute to the dollar’s continued supremacy.

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There are major obstacles in the way of China’s attempts to internationalize the yuan. Central banks are are concerned about geopolitical risks and declining yields on Chinese bonds. To further compound the reluctance are China’s problems with market openness and unpredictable regulations. The road to making the yuan a worldwide reserve currency is still difficult, even with programs like the Belt and Road, which seek to increase yuan usage.

The Future of Gold and Cryptocurrencies in Central Bank Reserves

For central banks, gold is still an essential asset since it offers protection against inflation and exchange rate fluctuations. China’s strong purchasing of gold is indicative of a larger trend in central banks’ reserves to diversify away from fiat currencies. With the current state of the economy and rising geopolitical concerns, the value of gold as a reliable store of wealth has increased significantly with the price of gold increasing 14.48%  so far in 2024.

Cryptocurrencies, on the other hand, are drawing interest as viable alternative assets. A few central banks have recently started looking at the potential of include crypto holdings in their reserves. Recent regulations (‘Prudential treatment of cryptoasset exposures‘) set by the Basel Committee on Banking Supervision, permit centrals banks to retain up to 2% of their reserves in crypto starting from Jan 1, 2025.

See:  Canada’s Proposed Mutual Fund Crypto Regulations 2024

This change in regulatory action is indicative of a growing institutional interest and appreciation for the innovative potential of stablecoins, decentralized financing (DeFi), and cryptocurrencies broadly. In contrast to gold, crypto is still viewed as more of a speculative asset due to its extreme volatility and regulatory concerns.

Conclusion

The global financial system is changing as central banks investigate the potential of crypto while favouring the US dollar and gold over the yuan. These trends will influence the future of central bank reserve management especially in the current geopolitical and economic climate of 2024.

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• Source: https://ncfacanada.org/central-banks-favour-usd-and-gold-amidst-de-dollarization/