Abuse of hegemony is why de-dollarisation is trending

 US itself is accelerating the de-dollarization process

 De-Dollarization and the Fall of American Hegemony

Ever since the Fed ended its ultra-loose monetary policy and turned to a radical rate hike approach, the international financial market has been in turmoil with many currencies depreciating sharply. That has forced many countries to diversify their foreign exchange reserve assets. – AP

 

MARKET expectations for the Federal Reserve to end interest rate hikes have picked up as core inflation data in the United States has dropped and the University of Michigan’s consumer confidence index fell from 67 in February to 62 in March – yet worries abound about the outlook for the US economy.

Former US Treasury secretary Larry Summers said recently that it is too early to say that the US has shaken off the financial woes caused by its rapid interest rate hikes. The US economy is likely to experience a serious recession as a result of the recent banking crisis, with little chances of a “soft landing”. With recession expectations picking up, the factors supporting a strong US dollar are disappearing.

Ever since the Fed ended its ultra-loose monetary policy and turned to a radical rate hike approach, the international financial market has been in turmoil, with many currencies depreciating sharply. That has forced many countries to reduce holdings of US Treasuries, diversifying foreign exchange reserve assets.

In mid-march, Russia’s central bank reported that the ruble and “friendly” currencies together accounted for 52% of Russian export settlements at the end of 2022, surpassing the share of the US dollar and euro for the first time on record.

The members of Asean agreed at the end of March to strengthen the use of local currencies in the region and reduce reliance on major international currencies in cross-border trade and investment. On April 1, India and Malaysia agreed to settle trade in Indian rupees.

Data show that the proportion of US dollar reserves and assets in global central banks’ foreign exchange reserves has dropped from 65.46% in the first quarter of 2016 to 59.79% in the third quarter of 2022.

Despite its declining status, the US dollar still accounts for the largest share of global trade settlement, central banks’ foreign exchange reserves, global debt pricing, and global capital flows. However, the abuse of the US dollar hegemony has led many countries to launch a “de-dollarisation” campaign. The more the US dollar is used as a weapon, the faster it will be abandoned by other countries.

It’s unrealistic that some in the United States want to safeguard the benefits brought by the US dollar as a leading international currency, but don’t want to shoulder corresponding international responsibilities. – China Daily/Asia News Network

 

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Yuan’s rising global influence

 

The currency’s correlation with an MSCI Inc index of its developing-nation peers rose to record in September on a weekly basis before edging back slightly amid the Omicron outbreak, Bloomberg data show.

` BEIJING: The Chinese yuan is having a greater impact on its emerging-market counterparts than ever before and may play a crucial role in determining their performance in the coming year.

` The currency’s correlation with an MSCI Inc index of its developing-nation peers rose to record in September on a weekly basis before edging back slightly amid the Omicron outbreak, Bloomberg data show.

` While the close relationship is partly a result of China’s large weighting, it’s also been driven by the yuan’s links to the Brazilian real reaching the strongest since at least 2008, and that with India’s rupee touching a three-year high.The yuan’s rising global influence is yet another sign of China’s deepening connections across the world economy.

` Investors are increasingly being drawn to its bonds as an alternative to United States Treasuries, while some banks are calling for the yuan to join the dollar, euro and yen as a global reserve currency.

` ADVERTISING Yet with China’s potential being offset by murky policy making and regulatory crackdowns, being tied too closely to the yuan may also backfire.

` “China is going to be a very important element of emerging-market stability and the growth picture,” said Magdalena Polan, principal economist at PGIM Ltd in London.

` “The willingness for Chinese policy makers to stabilise growth will be very important to the outlook for Latam and Asia and South Africa, as countries there still rely quite a lot on exports from China.”

` While correlations can be measured in many ways, China’s increasing presence in global trade has progressively boosted the yuan’s links with those of its emerging-market peers.

` In 2000, the average developing nation sent only 2.2% of its exports to China, while that proportion has now grown to 11.3%, according to data from Societe Generale SA.

` The investment bank says the yuan’s relative stability has traditionally made it most closely correlated with those of its emerging-market peers with strong and credible policy makers such as Mexico, Chile and South Korea.

` Since the US-China trade war in 2018, however, the yuan’s links with emerging markets as a whole have grown stronger, with the average correlation rising to 83% that year, according to SocGen data.

` There’s a risk of course that those very connections may also weigh on emerging-market currencies if the yuan begins to weaken. The major risk of that happening looks to be due to potential policy divergence, with the People’s Bank of China expected to ease monetary policy in 2022, just as central banks from the US, UK and Australia start to tighten.

` The yuan will face a particular challenge as the Federal Reserve beings to raise borrowing costs, a move that is anticipated to lead to a stronger dollar and outflows from emergin

`g markets. Still, China’s currency has so far shown itself to be relatively resilient to monetary policy at home and abroad. China’s economy has become an increasingly important influence on global growth over the past decade, and a vital one for emerging markets, according to JP Morgan Private Bank.

` “Since the financial crisis, we’ve had mini cycles in global emerging markets, largely coincident in China’s property and credit cycle and since the crisis that has been the key driver of the outlook in emerging markets for the most part,” said Alexander Wolf, head of investment strategy, Asia, at JP Morgan Private Bank in Hong Kong.

` The yuan’s relative resilience this year has also played a role in limiting fluctuations across emerging markets, in what has otherwise been a very tumultuous 12 months.

` “The fact that the yuan’s not doing too much I categorise it as a volatility suppressant,” said Paul Mackel, head of global foreign-exchange research at HSBC Holdings Plc in Hong Kong. “We believe that stability can last for longer.” — Bloomberg 

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