“There’s no option for any reserve currency other than the US dollar”
– Warren Buffett (Born 1930), Berkshire Hathaway chairman and CEO, an American business magnate, investor, and philanthropist.
When I landed in Singapore last Tuesday, I immediately felt the city’s energy. This was my home for the next three days, and my schedule was packed with discussions, panels, and presentations for the Nomura Investment Forum. I was about to delve deep into topics such as trade, finance, and business. Although it was going to be intense, I was prepared. I had spent the last decade modelling, researching, and compiling data and statistics for this moment. However, before I delved into the world of numbers and policies, I needed a boost, so I went to my favourite little coffee shop downtown. It wasn’t fancy or flashy, but it had a charm that reminded me of the mom-and-pop diners I used to frequent back in the US as a student.
What made this coffee shop special was its house-blend coffee. The beans were sourced from all over the world and mixed in a way that created a unique flavour. It was a coffee that people across the city loved and cherished, similar to how the US dollar is the preferred currency in the global economy. Just like people kept coming back to this coffee shop for their beloved house blend, the world keeps coming back to the currency.
As I sipped my favourite blend, I overheard chatter about a new joint that had just opened a few blocks away. This place was selling an entirely new blend, using exotic beans sourced straight from China. The rumours said it was different but worth a shot. This got me thinking about the rise of the Chinese yuan. Sure, it’s making waves, and people are noticing, but is it enough to dethrone the beloved, time-tested king – our own ‘house blend’ – the US dollar?
A currency, just like that perfect cup of joe, needs to hit three sweet spots to be accepted globally. First, it has to be versatile and universally accepted. It should be acting as a passport that gets you through any border without a hitch – a common medium of exchange. Secondly, it should be as reliable as the bedrock beneath your feet, a store of value that won’t let you down in your hour of need. Lastly, it should be a universal yardstick, a constant measure, like those golden arches that no matter where in the world you are, you know exactly what you’re going to get.
The dollar has earned its place as the global currency by ticking all these boxes. It stands in the world of currencies as Metallica does in the world of music – recognized, loved, and universally accepted. The yuan, however, is like a new band bursting onto the music scene. It’s fresh, trendy, and making some noise, but it has yet to prove it can top the charts and stay there.
The strength of a currency mirrors the popularity of a coffee blend, growing as more people use it. Think of it as “Master of Puppets” becoming a hit – the more it gets played, the higher it climbs on the charts. The US dollar is the number one hit that everyone knows and loves. The shift from the dollar to the yuan or any other currency, for that matter, would sound like persuading everyone to change their favourite song to “It’s My Life” by Bon Jovi overnight. It’s not impossible, but it’s going to take more than just a catchy tune.
I agree that there’s a lot of buzz about the Chinese yuan making headway, and rightly so. It’s the underdog football team that’s suddenly having a great season. However, just as that team has to consistently win game after game to finally lift the championship trophy, the yuan has to go beyond its current role to establish a significant global position. Recent data from SWIFT, the global provider of secure financial messaging services, confirm this narrative. According to their records, the yuan currently accounts for just 2.2 per cent of the value in SWIFT-exchanged messages. This places it below the British pound, which has a 6.6 per cent share, and the Japanese yen, which stands at 3 per cent.
In the grand arena of global finance, the US dollar and the Euro are the seasoned champions. The dollar, bearing resemblance to a veteran footballer with years of unmatched performances, boasts a whopping 41.1 per cent share. Close on its heels is the euro, with a significant 36.4 per cent share. Now, imagine if the mechanic in your neighbourhood started accepting home-baked pies instead of cash for car repairs. Sure, it could work if you’re a master baker and the mechanic loves pies. But for most people, the familiarity and dependability of cash reign supreme. The same applies to global trade – countries might experiment with other currencies, but in the end, the dollar’s universal acceptance remains unrivalled.
Moreover, the yuan, despite its growing popularity, has a handicap – it’s a promising athlete with a weak knee. The inability to completely convert it due to capital controls, coupled with a relative lack of transparency in China’s policy matters, impedes its full potential, allowing the dollar to maintain its stronghold.
As I boarded my flight back home, holding one last cup of that unique house blend in my hands, I realised something. Similar to the comforting familiarity of that special brew, the US dollar’s role as the linchpin of the world economy is not going away anytime soon. Trying to replace your favourite coffee with a new blend might seem like a good idea, but it’s not the same. And sometimes, what you know and love is hard to beat.
