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Europe’s central banks are starting to replace dollar reserves with the yuan

Signal of change / Europe’s central banks are starting to replace dollar reserves with the yuan

By Ella-Louise Micallef / 07 Mar 2018

For the past 70 years, the US dollar has been the world’s dominant currency, with two-thirds of the world’s allocated foreign exchange reserves held in US dollars. However, this looks set to shift, with the Chinese yuan growing in prominence in the European market.

In 2016 the IMF decided to include it in the currencies that make up the Special Drawing Right, an alternative reserve asset to the dollar. Then in June 2017, the European Central Bank announced it had exchanged €500 million ($611 million) worth of US dollar reserves into yuan securities. More recently the German Bundesbank said it would include the yuan in its reserves for the first time, resulting in the yuan hitting a two year high against the dollar after this was announced. Following this, the French central bank then revealed that it already held some reserves in yuan.

So what?

As most central banks hold their reserves in dollars, a shift to yuan, or any other currency, will impact the dollar adversely. Over the coming years and decades it is likely that the dollar will lose the dominance it has enjoyed up till now, instead sharing it with other currencies such as the yuan and the euro. However for China to have an international currency it will have to relax some of their financial controls, and improve financial transparency, which would allow for the Chinese market to open up further to international investment.



What might the implications of this be? What related signals of change have you seen?

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