BRICS: Is Chinese Yuan a Growing Threat to the U.S. Dollar?

At the ongoing summit in Johannesburg, the BRICS alliance has emphasized its intention to utilize local currencies for settling cross-border transactions among member nations. Among these currencies, the Chinese Yuan stands out as a formidable contender for facilitating remittances.

The question arises: If more countries opt to move away from the U.S. dollar and engage in trade using the Chinese Yuan, what impact will this have on the future of the greenback? In this article, we will assess the extent to which the Chinese Yuan might challenge the U.S. dollar's dominance.

Benn Steil, the Director of International Economics at the Council on Foreign Relations, has voiced the perspective that the Chinese Yuan is not poised to threaten the U.S. dollar. Steil pointed out that the Yuan constitutes less than 3% of the world's total global reserves. In stark contrast, the U.S. dollar accounts for a commanding 59% share of all global transactions in 2023. This substantial discrepancy between the two currencies suggests that the Chinese Yuan may not rapidly ascend in significant numbers.

The economist further emphasized that other currencies face limited prospects in challenging the global prominence of the U.S. dollar. He stressed that the primary threat to the USD emanates from the U.S. government and the Federal Reserve. According to Steil, unfavorable policies implemented by these entities could potentially hinder the dollar's trajectory, eventually creating room for other currencies to compete.

"The biggest threat to the dollar's dominance comes not from competitive alternatives, but from the U.S. government itself," he asserted. Additionally, he pointed out examples such as the recent federal debt ceiling standoff and the Fitch Ratings downgrade as manifestations of governance issues. Consequently, while foreign currencies may not pose a substantial threat to the USD, the policies of the U.S. government indeed represent a significant risk.