DECLINING DOLLAR DOMINANCE

 International Monetary Fund (IMF) was established in 1944 at Bretton Wood International Monetary and financial conference to foster global monetary cooperation, secure  financial stability, facilitate International trade ,promote economic growth and employment and reduce global poverty.  Bretton woods established a payment system based on the US dollar which  defined all currencies in relation to the dollar which itself was convertible into gold or as good as gold for trade($35=1ounce of gold). US currency  effectively functioned as the world currency and acted as the standard to which every other country's currency was pegged or fixed.The system provided a set of unified rules and policies that provided necessary framework to create fixed exchange rate for currencies across the globe. This system worked for many years smoothly. However in late1960s due to inflationary pressures backing the currency by the gold standard became a serious problem for USA. By 1971 US President Richard Nixon gave notification that the ability to convert the dollar to gold was being suspended "temporarily "which ultimately led to the  breaking down of Bretton Wood system. After the existing system collapsed IMF  has promoted the system of floating exchange rate wherein the market forces determine the value of currencies in relation to one another. By  1973 almost all major currencies began to float relatively to one another and the  floating exchange rate system still continues largely. 

 As international trade and financial movements increased gradually the  US dollar and Chinese Yuan or Reminbi conversion has been mostly watched by commentators because they are the largest economies . It has been observed that despite huge volumes of trade Yuan cannot equal  US dollars in three critical areas 1.Stability-Peoples Bank of China heavily regulate Yuan instead of allowing it to be freely traded. 2.Liquidity -The US treasury market is the most liquid in the world. 3.Security-Unlike US, Chinese financial markets are not open or transparent.They are heavily controlled by authorities. Relative economic strength of the  two countries are important. Dollar as a global reserve currency is demanded much and  half of international transactions were made in US dollar including  that for oil and gold.  The Yuan to dollar value had traditionally been fixed by Chinese central bank and never allowed to  rise or fall 2%.Gradually  People's Bank of China (PBOC  ) allowed Yuan to float.It is a  move to promote Yuan to compete dollar as the world's global reserve currency.  In July 2016 PBOC further relaxed its control of Yuan as a part of economic reforms and Yuan exchange rate was allowed to fall to 6.5567 from 6.5084 on January 1st 2016 and further to 6.9582 per dollar on December 18 2016.In 2017 Yuan benefitted much from the weakening of US dollar against Euro and consequent boost of Chinese exports. PBOC  reiterated the demand for treating Yuan as IMF reserve currency.The IMF required the Yuan to be driven more by market forces even if it meant greater market voltatility. 

 IMF'S major reserve currencies were US dollar, Euro, Dutch Guilder,Pound Sterling, Japanese yen ,Swiss Frank,Canadian dollar and SDR .The Special Drawing Rights (SDR) is an international reserve asset created by IMF based on a basket of currencies comprising of US dollar (41.73%) Euro (30.93%)Yuan (10.92%)Japanese  Yen (8.83%) and British pound sterling (8.09%). As far as individual countries Foreign Exchange Reserves (FER  ) position is concerned China top the list with $3222.4 billion (Nov 21) followed by Japan $1259.9 billion(Jan 22),Switzerland $1033.8 billion,India $569.9 billion, Taiwan $548.99 billion Hong Kong $478.7 billion, Russia $463.9 billion, South  Korea $437.5 billion, Saudi Arabia $429.5 billion and Singapore$ 407.8 billion. Not only China has two and half times FER compared to 2nd position  holding Japan but also along with Hong Kong Chinese share among the top 10 countries holding foreign exchange reserves account for whopping 40 percent. 

According to  many analysts Dollar dominance faces many risks and it could repeat the same fate and become lesser currency like UK pound in 1900s.US tough sanctions on Russia  raised concerns in many countries and tempted to move away from dollar. The move to freeze Russian central banks foreign currency reserves by the US and allies raised apprehensions about the power that dollar has been giving to US.lndia has already worked out rupee rouble  payment arrangements with Russia for trade. Chinese purchase of Russian oil and coal in Yuan is expected to reach China shortly. Europen countries could make payments to Russian energy  purchases in Renminbi.It may be noted here that IMF'S  Gita Gopinath observed that western sanctions against Russia could create a more fragmented global system that could damage the dollar. More over US has only a small share in global exports and relatively big importer of goods, compared to its dominance in global payments. Considering US debt position foreign investors may become reluctant to hold dollar assets in future. China is the world's second largest economy with 13.04% of global GDP and the largest exporter with a global market share of 14.7%.According to IMF'S  Currency Composition of Official Foreign Exchange Reserves (CO FER) data by the end of 2021 Yuan was in the 5th place after US $,Euro, Japanese yen and the pound sterling. US $  which accounted for 70% of CO FER in 2007 declined to 58.8 % in 2021.

 Yuan's use in global foreign exchange reserves has been continuously increasing and it may rise further amid sanctions between Russia and West.China's rising economic position and push towards internationalisation claims in  Yuan amounted to $336.1 billion in the 4th quarter of 2021 accounting for 2.79% of total FER allocated. Yuan's internationalisation measures comprise of currency swaps, Belt and Road initiative and as foreign trade increases the channels and demand  from overseas countries for Yuan will automatically rise.Experts opine that Yuan might become one among the top three reserve currencies for global central banks in  the next 10-20 years provided China gradually ease restrictions on capital flows.In any case US dollar dominance is at stake.Still many believe that dollar dominance will continue to work because people largely trust things like New York law and institutions like Federal Reserves.By all probability eventually it may become a multipolar economic system where US and China will be major players in future.