Market Overview

What if the Yuan replaces the Dollar as the Global Reserve Currency?


A recent decision by the People's Bank of China which doubles the trade range of the Yuan against the dollar is causing a considerable stir among investors. This is seen as a further indication that PRC seeks to broaden its economic base into the free markets as a part of the broad reaching economic reforms it is instituting in the country. A double down increment on the daily range from 1% to 2% sent investors scrambling for answers as to how solid the dollar is as the world reserve currency. Where once the answer seemed to lay in the direction of the Euro, that has ceased to be a viable hope for the future for almost all savvy investors.

How much influence would the Yuan really have?

The answer is not as simple as "worry, don't worry"; the unpredictable nature of the PRC reforms and the influence of even a minor portion of its GNP on the free markets presents a serious threat to the hold of the USD on the reserve spot.  The unspoken analysis of industry insiders is a cautious support of the dollar in its traditional role because of repeated Standard & Poor's threats to downgrade the US credit rating coupled with the open knowledge that one of the biggest financial lenders supporting the US Economy is the People's Republic of China. For many it is not a question of the dollar losing its place, but that it already has all but in name. It is also further indication of the change in balance of power in the world with the former superpowers sliding out of influence and the new powers rising. That these new superpowers, Mexico, Brazil, India and China, who are all considered developing economies, are entering the free market spectrum makes for a concerning amount of unpredictability in the finance world.

Investors hedging their bets

Investors have been voicing concern about the stability of the US dollar as the reserve currency since the drama of the 2007 fiscal crisis. While many then threw their funds behind the Euro, the ensuing fiscal problems plaguing the European Union have cast great doubt that the Euro will even survive as a currency beyond the next quarter of the century. It is China that seems poised to enter the market with the most reliable reserve form. However, the PRC is discovering that the price one pays for entering the free market economy comes in the form of a lack of control over reporting and media accounts. What once seemed like a solid bet (Yuan growing into its role of a world stabilising currency on the possibility of an Euro decline) has now been marred by the recently revealed economic crisis and corruption probes within the People’s Bank of China. As for trading advice, Davison, Director at a binary options platform says “Long Yuan might be the way to go. However, do not expect wide ranging swings in this market for now. You might also consider long position in the New Taiwan Dollar (TWD)”. For the investor, hedging one’s bets is looking more and more like fortune telling and wishful thinking for at least the next 8 months. Maybe by then one of the three currencies will have taken a turn that will provide some guidance for the future.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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