EC Seriously, Good Luck Dethroning The (Euro)Dollar

Scarcely a week goes by without some grand prediction of the dollar being dethroned. Set aside how if anything is to be deposed it would have to be the eurodollar, these stories typically follow the same formulaic approach: Country X is moving away from dollar reserves, “diversifying” its holdings because of the geopolitics of Y.

Usually, it is the Chinese who are set to play the role of upstart. It makes sense. As the world’s second-largest national economy coupled with far greater international aspirations, why not yuan?

This from just a few days ago:

China is heavily exposed to the U.S. dollar, but now, with the risk of “decoupling,” Beijing is silently diversifying its reserves to reduce its dependence on the world’s largest reserve currency, analysts say.

Or how about this one:

Fresh data suggest China is moderating its appetite for investing in U.S. securities, a trend that could mean lower flows of cheap capital from Beijing and a possible rise in borrowing costs across the American economy.

An analysis of U.S. Treasury data suggests China, with $3.2 trillion in foreign-exchange reserves, has begun to rapidly diversify its currencies portfolio.

This other quote, though, that was from March…2012. China, as you might recall, has been “diversifying” its reserves for going on a decade now. And the dollar yet dethroned.

According to the latest BIS numbers (triennial survey), the dollar denomination is still used as one side in 88% of all the world’s forex transactions. RMB: 4%.

Why?

To begin with, there’s a fundamental misunderstanding about the idea of “diversifying.” Actively switching out of US$ assets is one thing, and that’s how it is written up (oh, I meant to do that!), but what most often happens is the “dollars” stop flowing to whatever foreign location and therefore the proportion of them in that location’s holdings necessarily falls. Especially when that very same place gets hit with a more extreme case of having to outright sell US$ assets – as so many have done especially since 2014.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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