The US dollar has been the dominant reserve currency for decades, but its decline as a reserve currency has raised concerns about whether a rival currency will dethrone it. According to economist Stephen Jen, a more plausible outcome would be multiple currencies cutting into the dollar's dominance. He believes that a "tripolar" reserve currency system, with the euro and the yuan having roughly equal presence, would be more aligned with the economic heft of the three blocs.
However, Jen noted that all other currencies have flaws, especially as international currencies. For the yuan to make headway, China's financial sector would first have to improve in quality. Foreign investors remain wary of buying into Chinese equities and bonds, and capital controls would need to remain in place, making it difficult for the yuan to become a viable international currency.
While there have been some announcements of bilateral trade being settled with China's currency, those volumes are small, and don't compare to volumes seen across larger financial flows. Still, the yuan eclipsed the US dollar last month as the most used currency for Chinese cross-border transactions.
Central banks are also shifting to gold, with a record 33% of monthly global demand for gold accounted for by central banks. However, the dollar's share of global currency transactions for trade finance remains dominant, with analysts saying that the yuan is too tightly controlled by the Chinese government.
In conclusion, while the US dollar's dominance as a reserve currency may continue to erode, a non-dollar currency commanding a bigger market share than the dollar is unlikely. A "tripolar" reserve currency system with the euro and the yuan having roughly equal presence could be a plausible outcome, but there are challenges to overcome before this can happen.
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