We have written about the dollar reserve currency risk premium over the last few months. More talk has occurred about the role of the dollar as a reserve currency in the last six months than in years. This talk continued with a Bloomberg story that the yuan is deposing the dollar on China's border. More transactions will be allowed to be settled in yuan. This is a policy objective of the PBOC. The PBOC has also provided over $95 billion in swap lines to countries like Argentina, Belarus, Hon Kong, Indonesia, Malaysia and South Korea in 2009.
This growing importance of the yuan makes perfect sense. There is little reason to have settlement in a third currency for close cross-border trade. Given the size of the Chinese economy and its growing role in global finance, it should also be expected that these events will continue to occur and the PBOC will ask for more policy input with the IMF. The dollar will have to suffer. This may have nothing to do with the value of the dollar as much as it has to do with ascent of China; nevertheless, current policies by the US do not help to strengthen the dollar.
This growing importance of the yuan makes perfect sense. There is little reason to have settlement in a third currency for close cross-border trade. Given the size of the Chinese economy and its growing role in global finance, it should also be expected that these events will continue to occur and the PBOC will ask for more policy input with the IMF. The dollar will have to suffer. This may have nothing to do with the value of the dollar as much as it has to do with ascent of China; nevertheless, current policies by the US do not help to strengthen the dollar.
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