Since the outbreak of the new crown pneumonia epidemic, new features have emerged in the global currency landscape

　　The international monetary pattern shows new features

　　Wen Bin

　　Since the outbreak of COVID-19, new features have emerged in the international monetary landscape.

The U.S. dollar index climbed, while other major currencies fell sharply. The proportion of various currencies in international payments also showed a similar trend.

However, the share of the U.S. dollar in global foreign exchange reserves has generally declined, mainly due to the abuse of financial sanctions by the United States, especially the frequent use of SWIFT as a public tool.

Abuse of sanctions weakens the dollar.

Looking ahead, the pace of reshaping the international monetary system may further accelerate.

　　Since the outbreak of COVID-19, new features have emerged in the global currency landscape.

　　After the initial chaotic period, with the gradual recovery of the U.S. economy and rising interest rate expectations, the U.S. dollar index has entered an upward channel from May 2021, while other major currencies such as the euro, pound, and yen have moved synchronously. weak.

　　Since the beginning of this year, the US dollar index has accelerated its climb, while other major currencies have fallen sharply against the US dollar.

As of the end of July, the US dollar index closed at 105.8361, up 10.28% from the end of the previous year; the euro depreciated by 10.05% over the same period; the pound depreciated by 10.00%; the yen depreciated by 15.73%.

The RMB exchange rate has also experienced relatively large fluctuations this year, but the volatility is significantly smaller than that of other major currencies. In the first seven months of this year, the onshore RMB depreciated by 5.74% against the US dollar, while the China Foreign Exchange Trade System (CFETS) RMB exchange rate index rose slightly by 0.15 %.

　　Corresponding to the exchange rate trend, the proportion of various currencies in international payments also showed a similar trend.

According to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the market share of the U.S. dollar in international payments was 38.73% in December 2020, rose to 40.51% in December 2021, and further rose to 41.16% in June this year, compared with the end of 2020. In the same period, the market shares of euro, pound and yen in international payments all showed a downward trend. In June this year, they were 35.55%, 5.96%, and 3.01%, respectively, down 1.15, 0.54, 0.58 percentage points.

The market share of the renminbi in international payments has risen sharply for a time, and in late 2021 and early 2022 it even surpassed the Japanese yen to become the fourth largest currency in the world.

Since then, however, with the weakening of the yuan, its market share in international payments has also declined, to 2.17% in June this year.

　　Whether it is from the exchange rate trend or the proportion of international payments, it is not difficult to see that the importance of the US dollar in the international market has increased significantly in recent times, which is mainly caused by the following factors:

　　First, the U.S. economy took the lead in recovering and pushed the dollar to strengthen.

Under the massive stimulus, the U.S. economy recovered significantly faster than other advanced economies.

Although the global stagflation and even recession expectations have become stronger this year, and even when the U.S. GDP has declined at an annualized rate for two consecutive quarters and a technical recession has already occurred, the market still generally believes that the U.S. economy is better than other developed economies.

　　Second, the U.S. dollar swap mechanism led by the Fed during the epidemic has further expanded and strengthened the liquidity of the U.S. dollar.

In the early days of the outbreak of the epidemic and the early days of the Russian-Ukrainian conflict, there was an obvious phenomenon in the foreign exchange market that pushed up the value of the US dollar due to tight liquidity.

The ultimate safe-haven function of the U.S. dollar is to a certain extent a manifestation of its “no choice” (TINA) effect, and the Fed has further expanded and strengthened the global reliance on the U.S. dollar by promoting the institutionalization and multilateralization of currency swaps.

　　Third, the strength of the US dollar since 2021 has a certain relationship with the change of the US government.

During the Trump administration, the United States paid more attention to the trade balance and believed that a weak dollar would help increase exports. Therefore, Trump himself frequently pressured the Fed to maintain a weak dollar.

After the change of the U.S. government, this political pressure has significantly weakened.

In July this year, the current US Treasury Secretary Yellen said that the United States is committed to the market to determine the dollar exchange rate.

In fact, from the perspective of lowering import prices, maintaining a strong dollar may help to solve the biggest problem in the United States - high inflation.

Under the pressure of the strong dollar, other major currencies generally weakened, especially since the beginning of this year, the energy crisis caused by the geopolitical conflict has greatly deteriorated the economic outlook in Europe, causing the euro to fall below the parity level against the dollar for a time; Japan The central bank maintained a relatively loose monetary policy despite the general interest rate hikes in various countries, resulting in a sharp depreciation of the yen.

　　However, by observing the changes in the share of global foreign exchange reserves, the other side of the currency change will be found.

Since the epidemic, the share of the U.S. dollar in global foreign exchange reserves has generally declined. Although the share increased sharply in the first quarter of 2021, it fluctuated and declined. At the end of the first quarter of this year, it was 58.89%, a slight decrease of 0.04 percentage points from the end of 2020. In the same period, the proportion of euro and yen decreased by 1.23 and 0.67 percentage points respectively, while the proportion of pound and renminbi increased by 0.24 and 0.59 percentage points respectively.

　　The decline in the status of the US dollar in global foreign exchange reserves may be caused by a combination of factors, including the heavy debt burden of the United States and the “big water release” of the Federal Reserve, but the most important of them is the abuse of financial sanctions by the United States, especially its frequent SWIFT is "used for private use", which will inevitably prompt some countries to accelerate the pace of "de-dollarization".

Previously, in response to U.S. sanctions, Russia, Iran and some European countries have been actively discussing reducing oil trade in U.S. dollars. This year, the Russian central bank’s foreign exchange reserves were frozen, allowing more countries and regions to re-examine the value of U.S. dollar reserves.

In this context, the US dollar has risen in the international payment market share according to SWIFT, but has fallen in the share of global foreign exchange reserves according to the International Monetary Fund. The sharp contrast between the two may better reflect the abuse of sanctions against the US dollar. weaken.

Although SWIFT occupies an extremely important position in cross-border payments, not all cross-border payments are completed through it, so the contrast of the above data may also be explained by the diversification of global cross-border payment systems, that is, some countries Efforts to build a cross-border payment network other than SWIFT to escape potential political interference.

　　There is a precedent for the United States to sanction other countries through SWIFT, but it has intensified in recent years, resulting in the possibility of a long-term trend decline in the share of US dollar reserves.

Especially since 2015, the share of the US dollar in global foreign exchange reserves has been decreasing year by year. On the contrary, the share of the euro, the yen, the pound and the renminbi has increased to varying degrees.

Since the beginning of this year, under the intertwined influence of many factors such as the new crown pneumonia epidemic, the conflict between Russia and Ukraine, the energy and food crisis, and the Fed’s interest rate hike, the global economic and political situation has become more complicated, and the problems existing in the original international monetary system have become more prominent. Whether Russia announces settlement in rubles or India announces settlement in rupees is essentially a challenge to the traditional dollar hegemony.

　　Looking ahead, the pace of reshaping the international monetary system may further accelerate.

In this global currency change, China should not only seize the opportunity to accelerate the internationalization of the RMB, but also actively participate in the formulation of new international rules, so as to contribute to the formation of a fairer, more stable and diversified international monetary system.

　　(The author is Chief Economist of China Minsheng Bank)

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