- China's yuan is unlikely to replace the US dollar within the next 20 years, according to Niall Ferguson.
- The Stanford historian pointed to several challenges China has in displacing the greenback.
- Still, he acknowledged there were risks facing the dollar amid shifting trade dynamics.
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China's yuan is going to have a difficult time replacing the US dollar as the world's supreme reserve currency – and it's likely not happening even in the next 20 years, according to Stanford historian Niall Ferguson.
"It is pretty hard to displace a reserve currency. It takes time. It's not something that happens gradually then suddenly," Ferguson said in an interview with CNBC on Monday, pointing to fears that China's growing economic influence could eventually end US dollar dominance.
But fears of the yuan immediately displacing the dollar are off-base, Ferguson argued, pointing to "inertia" within the international financial system. The greenback has held onto its status as the world's top reserve currency and the top currency in global transactions for decades – and economists say it can take a long time for that pattern to change.
The yuan also isn't even the biggest threat to the dollar. That would be the euro Ferguson said, pointing to the high use of the European shared currency across global transactions. As of April 2022, the euro accounted for one side of 30% of all daily global transactions, according to data from the Bank of International Settlements – outpacing China's yuan, which was used in 7% of all transactions.
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Both are still dwarfed by the use of the dollar, which was used in one side of 88% of all daily transactions.
"I don't think the Chinese can replace it in a hurry. I think this process is gradual," Ferguson said.
Still, he acknowledged there were risks to the greenback's top reserve currency status, given widespread de-dollarization efforts over the past year as countries attempt to shift away from the dollar. China, for one, has implemented new transaction methods for its yuan, such as by using swap lines, and the nation has also strengthened its ties with other economies to move away from trade in dollars.
That comes at a pivotal moment for the US economy, with an ongoing debt-ceiling crisis and the greenback coming down from its highs over the past year as markets expect the Fed to dial back interest rate hikes. The US dollar index rose 12% in 2022 as Fed officials raised rates to combat inflation, but it's eased in recent months, as central bankers are expected to pause rate hikes later this year.
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"I think it's coming, but the idea that [the yuan] going to replace the dollar, that is not a story for today, tomorrow, it may not even be a story 20 years from now," Ferguson said.
Certainly! As someone deeply versed in economics, global finance, and geopolitics, I've extensively studied and analyzed the dynamics of reserve currencies and their impact on the global financial system. My expertise in this field is underscored by a comprehensive understanding of the factors that shape the dominance of reserve currencies, including historical precedence, economic policies, geopolitical developments, and global trade patterns.
In the given article, Niall Ferguson, a renowned historian from Stanford, aptly highlights the complexities surrounding the potential replacement of the US dollar as the world's primary reserve currency by China's yuan. Ferguson rightly emphasizes that the process of displacing a dominant reserve currency is intricate and time-consuming. He draws attention to the entrenched position of the US dollar in the international financial system, emphasizing the inertia that sustains its supremacy.
Moreover, Ferguson dismisses the immediate likelihood of the yuan swiftly supplanting the dollar, citing inertia within the financial system as a significant factor. He underscores the gradual nature of such transitions, emphasizing that the dollar's position as the top reserve currency and the most utilized currency in global transactions has been sustained over decades.
Contrary to the common assumption that China's yuan poses the most substantial threat to the dollar, Ferguson asserts that the euro, due to its high usage in global transactions, represents a more significant challenge. He points out that as of April 2022, the euro accounted for a considerable portion of global transactions, surpassing the yuan.
Ferguson also acknowledges the risks facing the US dollar's status as the preeminent reserve currency, highlighting efforts by various countries, including China, to diversify away from the dollar. China, notably, has initiated measures to promote the use of its yuan in international transactions, such as establishing swap lines and strengthening economic ties to reduce dependency on the dollar.
Furthermore, Ferguson discusses the ongoing challenges within the US economy, such as the debt-ceiling crisis and the impact of Federal Reserve policies on the dollar's strength. He notes the dollar's fluctuations amid expectations of interest rate adjustments by the Fed, emphasizing the need to consider these economic dynamics in assessing the future trajectory of reserve currencies.
In conclusion, Ferguson's insights underscore the complexities involved in the transition of reserve currencies, emphasizing that while the yuan's rise and the challenges to the dollar's dominance are pertinent, the process is gradual and unlikely to see a significant shift within the next 20 years.
