Dollar Spared as Yuan Undercuts Euro and Yen's Global Status

(Bloomberg) -- Dollar bulls can breathe easy: The yuan’s relentless march toward global reserve currency dominance isn’t coming at the greenback’s expense overall.

Not yet, at least.

Instead, it’s the euro and yen that are making way for the Chinese currency’s growing status, according to Deutsche Bank AG analysis.

The driver is economics 101: central banks hold reserves in currencies that matter most to their economies, and there are no signs of the dollar’s global influence waning yet, according to strategist Robin Winkler.

“The rise of the yuan as a reserve currency need not necessarily spell trouble
for the dollar,” he wrote in a note this week. “While geopolitical concerns may contribute to some rebalancing from the dollar to the yuan, economic and financial developments suggest that the yuan is more likely to take over from the euro and the yen as the major alternative reserve currency.”

China’s influence is a key question for global markets, as President Donald Trump heaps pressure on the Asian nation over its trade surplus and what he sees as decades of theft of American intellectual property.

While the yuan has been sliding amid dollar strength -- it’s poised to notch the longest monthly decline in three years -- near-term moves have little bearing on its international status, which is growing alongside the country’s economic influence. The currency may also be due a rebound on reports the U.S. and China are attempting to restart talks to avert the trade war -- the offshore yuan erased an earlier drop when the news broke on Tuesday.

China’s currency is down over 4 percent against the greenback this year, and was little changed at around 6.8080 per dollar at 7:10 a.m. Wednesday in Tokyo.

Undermining the Push

Unicredit Bank AG said last week it expects capital controls and the lack of full currency convertibility to undermine the country’s push for the yuan to have a bigger cross-border role.

Still, Russian President Vladimir Putin told reporters this week he sees the yuan as a potential reserve currency. And China has shown some signs of liberalization, such as measures that make it easier for overseas lenders to borrow the currency.

Analysis from Deutsche Bank, ranked the world’s eighth-largest currency trader by Euromoney Institutional Investor Plc, suggests policies like these are bearing fruit.

Winkler used the movement of 52 currencies relative to the four main reserves (dollar, yuan, euro and yen) and divided the total GDP of those economies based on those moves.

The conclusion: the yuan-currency bloc now captures almost a third of the total GDP, versus about 20 percent three years ago, with the exchange rate’s influence spreading across Asia and Latin America.

Latam Catch

Crucially for the greenback bulls, the analysis also showed that the dollar bloc increased its share, to 48 percent from 39 percent. Consequently, the euro and yen blocs shrank to 19 percent from 29 percent and to 5 percent from 13 percent, respectively.

There’s a catch: there is some evidence the yuan’s role in Latin America is growing at the expense of the U.S. currency, with exchange rates in Colombia and Chile now moving to the Sino beat, compared with little sensitivity in 2015.

But overall, the “secular increase” in global yuan reserves in the coming years “would likely be more of a problem for the euro and the yen than for the dollar,” according to the Deutsche strategist.

To contact the reporter on this story: Samuel Potter in London at spotter33@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Sid Verma, Yakob Peterseil

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