(Bloomberg) -- For all the human and economic damage it has wreaked on the U.S., the coronavirus crisis has reinforced the most important vestige of American power in the global economy: the supremacy of the dollar.
The U.S. moved decisively to help foreigners get dollars when markets started seizing up in March. And in contrast to a previous tendency to emphasize the negatives of a strong exchange rate, U.S. President Donald Trump has highlighted the positives of overseas demand for the greenback.
Beijing, meantime, has been noticeably silent on any criticism of the dollar’s outsize role in the world -- in contrast with the aftermath of the Lehman meltdown when its central bank governor called for the adoption of a global currency to displace the dollar’s dominance.
“The Fed has signaled the importance of keeping dollar liquidity in international markets” through moves to expand swap lines with emerging markets, said Paola Subacchi author of “The People’s Money. How China is building a global currency” and a professor at the University of Bologna. “The question of the yuan competing head to head with the dollar could have some traction about eight years ago, but it is no longer the case.”
The numbers tell the tale. The dollar is used in 88% of all currency trades, according to the latest triennial Bank for International Settlements survey. It accounts for 61% of the world’s foreign-exchange reserves, IMF data show. And the greenback has a 44% share of payments over the Swift global system, well in excess of the U.S. share of world GDP, at about one-quarter.
The Federal Reserve has made it easier for other central banks to get dollar cash by letting them swap their Treasuries holdings. The decisions stood out because some American legislators had criticized the Fed for providing dollars to foreign central banks after the global financial crisis.
While Trump on April 17 noted the damage to exporters of a strong dollar, he also extolled the value of foreign capital. “Everybody wants to invest in our country,” and “people want the safety of our country,” he said. A strong dollar is “overall very good.”
Strong Dollar
“The Fed’s activism and Trump’s flip on a strong dollar reflect U.S. anxiety in the face of the narrative that China will emerge from the pandemic as the new world leader,” said Hui Feng, a senior research fellow at Australia’s Griffith Asia Institute.
Hui, co-author of “The Rise of the People’s Bank of China (OTC:BACHY),” also highlighted how China’s rhetoric has changed from the wake of the 2007-09 financial crisis -- when Chinese officials moved to boost the role of the yuan.
“I see a stark contrast,” Hui said. “Beijing has been more realistic this time.”
Even as China opens its giant bond and stock markets to overseas investors, the existence of capital controls makes some fund managers wary, acting as a brake on its ambitions to expand global use of its currency.
“China is too early in its transition to a more market-driven economy to jump to a currency leadership position,” said Kathy Walsh, a finance professor at UTS Business School in Sydney who specializes in capital-markets research.
“It is more likely that the plans to internationalize the RMB will be shelved while China navigates the rebuilding of its post-Covid economy,” she said, referring to the renminbi, the official name for China’s currency.
Yuan Use
Still, Beijing is continuing to promote international use of the yuan. A steady opening of the domestic bond market to foreign funds has successfully continued to lure overseas money even amid the coronavirus crisis -- with more than $7 billion in April, taking the total to about $326 billion.
Any moves by China to price more of its imports -- commodities especially -- in yuan could also boost the currency’s global role. Shanghai made waves by launching crude oil futures in 2018.
Meantime, the Trump administration’s liberal use of the dollar’s supreme status to enact sanctions on Iran and others could ultimately diminish the appetite for some countries to use the greenback. And not every emerging market has access to the Fed’s dollar helplines -- Turkey and China aren’t on the list.
So while the greenback remains head and shoulders above the rest, the yuan competition remains and it may not be clear for some time whether a fundamental transition is already under way. Indeed, history shows the dollar’s own march toward becoming the prime global currency took decades.
“Historical shifts in the nature of the international monetary system occur at crisis points,” said David Lubin, London-based head of emerging-market economics at Citigroup Inc (NYSE:C). and author of “Dance of the Trillions: Developing Countries and Global Finance.”
“The right question to ask is: Is this a historical turning point sufficient to lead to a change in the rules of the international monetary order?” Lubin said.
For now at least, the answer appears to be no. Federal Reserve Bank of St. Louis President James Bullard declared as much Tuesday, saying the dollar’s dominance would stay for quite a while, with other currencies not in a position to pose a challenge.
Indeed, many emerging markets are actually strengthening their ties with the dollar as they shore up funding to get their economies through the virus crisis. Indonesia mounted a record sale of more than $4 billion of dollar bonds in April. That was part of a $47 billion slew of sovereign dollar issuance by developing nations, the biggest month on record, according to data compiled by Bloomberg.
Total dollar credit extended to borrowers outside the U.S., excluding banks, climbed to a record $12.2 trillion by last December, BIS data show. That’s about double the level a decade before. It amounted to about 14% of global GDP; the ratio back in 2009 was about 10%.
That gargantuan amount of offshore dollar debt showcases how crucial liquidity in greenbacks is, and the importance of Fed moves to ensure it. At this point, it’s hard for some observers to conceive China stepping in quite so dramatically -- even if it has signed hundreds of billions of dollars of swap agreements in yuan with counterparts around the world.
“It would be difficult to keep yuan liquidity while maintaining capital controls,” Subacchi said. “The Chinese authorities have no intention to liberalize capital movements, even if they have been fine tuning the system on the margins.”
Soft Power
China’s actions during the coronavirus crisis may also have postponed the time when the yuan might rival the dollar from the standpoint of “soft power.” By that fuzzy measure of popular acceptance and approval, China has taken some bruises with concerns about its transparency.
“China has ample hard power but a deficit in soft power,” said Stephen Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital in London. “The U.S., regardless of one’s opinion on any specific president, still commands probably the greatest hard and soft power of them all.”
The bottom line, Jen said, is that the dollar “will likely become increasingly dominant.”
©2020 Bloomberg L.P.