Hassouna Al Tayeb (Abu Dhabi)
As part of their efforts to diversify their foreign exchange reserves, the world’s central banks are turning to the Chinese yuan, in a gesture that indicates the gradual decline in the dominance of the dollar, in light of the tensions that afflict the global political arena.
The proportion of reserve managers in central banks, who invest or who have the desire to invest in the yuan, increased from 81% in 2021 to about 85% this year, according to a survey conducted by UBS Investment Corporation, on 30 of the major central banks between the period between April and June 2022.
gradual deterioration
“We notice a gradual deterioration in the strength of the dollar, and the picture that is emerging now is one within a multipolar monetary system,” says Massimilano Castelli, director of foreign reserve strategy at UBS.
The increase in desire for the Chinese currency came after Western powers froze about $300 billion in Moscow’s hard currency reserves, as part of the sanctions imposed by these powers on Russia due to its invasion of Ukraine at the beginning of this year, according to the Financial Times.
While most managers polled view the move as a one-time event, it pits those Western powers against Russia and complicates relations with countries that do not accede to sanctions, including China.
This increases the size of the gap between America and China, which already began during the trade war waged by the administration of US President Biden.
80% of the managers surveyed by UBS confirmed that the trend towards adopting a multipolar world away from the US centralization system is in the interest of the yuan, while the rest favor the dollar.
US inflation
Concerns about US inflation, and the Fed’s efforts to combat it, also affected short-term sentiment towards the dollar. Central banks usually hold the dollar through US government debt, which was sold off heavily this year, while the Federal Reserve tightened restrictions on monetary policy. The survey indicates that foreign reserve managers are seeking alternative assets such as stocks and debt. Green and inflation-protected bonds, in light of concerns about holding US Treasury bonds. Nearly 50% of the managers surveyed confirmed that their portfolios are currently diversified, compared to the previous period.
While the dollar remains by far the best reserve currency in the world, this leadership is currently tainted by some doubts.
dollar reserves
The dollar accounted for nearly 60% of the allocated reserves at the end of the first quarter of 2022, down from 65% in the same period in 2016, according to data from the International Monetary Fund. Meanwhile, the yuan’s ratio was just under 3%.
Most central bank managers have increased their cash reserves from the dollar during the current year so far. While 62% of these managers increased their reserves in dollars in the past year, about 54% of them moved to reserves in yuan.
“It is clear, at the end of the day, that central banks and reserve managers have taken into account the armament of another currency, in order to counteract market volatility and the variables that may occur in the macro economy,” says Massimilano Castelli, director of foreign reserve strategy at UBS.
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