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A dollar decline is overdue

For anyone who follows currency trends, and indeed asset markets more generally, the triennial survey from the Bank for International Settlements is invaluable. Although no survey is perfect, its three-year time horizon is long enough to remove a lot of the ‘noise’ of short-term fluctuations.

The foreign exchange (FX) survey has been going since 1986, so there is a long run of data. A parallel survey of the over-the-counter derivative markets has run since 1995.

Perhaps the most striking aggregate figures are those showing that global turnover in FX markets fell to an average of $5.1trn (€4.5trn) per day in April 2016 compared with $5.4trn in April 2013. This is the first reversal of a protracted upward trend that has lasted for many years. Having said that, the FX swaps market has continued to grow, so the direction is not all one way.

The halt to the spectacular growth in FX trading seems to confirm the common observation that the growth of globalisation has stalled. Trade growth is also subdued. It is not that the whole process has reversed, it is not deglobalisation, but the current level of globalisation seems to be stable.

In relation to specific currencies it should not be a surprise that the Chinese renminbi has become the most frequently traded emerging market currency. It has overcome the Mexican peso to take eighth place overall. 

Nevertheless, the renminbi is still a long way from superseding the dollar as the world’s pre-eminent currency. The renminbi was on one side of 4% of all trades in the latest survey, whereas for the dollar it was 88%. The dollar is still the world’s money. Indeed, 95% of the renminbi’s own trading was against the dollar.

So despite the fact that, when measured at purchasing power parity, the Chinese economy is the world’s largest, the dollar is still dominant. Indeed, the renminbi remains less actively traded than the euro and the yen but also less than relative minnows such as the Canadian dollar.

This situation cannot last. The US share of world output fell from 22% in 1980 to 16% this year, according to the International Monetary Fund. Over the same period, China’s share rose from 2% to 17%.

Since the international role of each currency in the world broadly reflects the country’s economic weight, a more substantial shift is overdue. This could come about suddenly rather than gradually. 

The dollar superseded sterling as the dominant currency at around the time of World War 1. That is not – mercifully – to predict that another global conflagration is due but to suggest events could trigger a rapid rise in the importance of the renminbi.

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