For the past 70 years, the US dollar has been the world’s dominant currency. Two-thirds of the world’s $6.9 trillion allocated foreign exchange reserves are held in US dollars. The yuan took a major step towards broader international adoption in 2016 when the IMF decided to include it in the basket of currencies that make up the Special Drawing Right, an alternative reserve asset to the dollar. [...]
The Chinese yuan hit a two-year high against the US dollar this week, after the German Bundesbank said that it would include the yuan in its reserves for the first time. “The notable development from the European point of view over the past few years has been the growing international role of the renminbi in global financial markets,” Andreas Dombret, a member of the central bank’s executive board, reportedly said at a conference in Hong Kong (paywall). The decision was made last year and no investments have been made yet, as preparations are still in process. The French central bank then revealed that it already held some reserves in yuan.
As most central banks’ reserves are held in dollars, any shift into other currencies, such as the yuan, will come at the expense of the greenback. In June, the European Central Bank announced that it had exchanged €500 million ($611 million) worth of US dollar reserves into yuan securities. This was a small shift—the ECB has €44 billion in foreign exchange reserves—but nonetheless it reflects China’s growing prominence in the global financial system.
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