How US dollar dominance is built on America’s irresistible appeal to investors
- The size of an economy is important but is not the only factor in a currency’s draw
- If the yuan seeks to be the world’s reserve currency, China must offer a similarly attractive investing environment, with few capital controls, attractive yields and depth in bond market liquidity
The renminbi’s profile is rising but it is not a viable challenger to a US dollar whose hegemonic status is cemented by the global financial system itself. The system’s requirements underpin the greenback’s dominant position.
The renminbi’s share will undoubtedly rise, given the size of China’s economy and with Beijing taking measures to facilitate yuan internationalisation. But the Chinese currency won’t be challenging the US dollar any time soon because, in reality, more underpins the US dollar’s global dominance than just being the currency of – at least for now – the largest economy on Earth.
That is not to deny that economic strength is a prerequisite for a dominant world currency. Indeed, the post-1945 hegemony of the US dollar derives from the United States being the only major economy that ended World War II with an undisrupted monetary system, a healthy trade surplus and a thriving industrial base that was undamaged by conflict.