US dollars and Chinese yuan arranged a photo on September 7, 2017.
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SINGAPORE – The Chinese yuan has “a long way to go” before challenging the status of the US dollar as a reserve currency.
That says David Roche, President and Global Strategist at Independent Strategy.
“It is very, very difficult to dethrone the dollar – which the euro tried and got involved in a miserable 18-20% of all international events,” Roche told CNBC’s “Squawk Box Asia” on Monday.
A number of “almost abstract” conditions, including not too much influence on the system and the rule of law, must be met before a currency can achieve reserve status, the strategist said. He added that the Chinese yuan is “far from being able to do that.”
“Right now there is some illusion that the (yuan) – which makes up 2% of international trade and even less when it comes to financial investment flows – can do this,” Roche said.
He was also skeptical of arguments that the People’s Bank of China’s digital currency will be the “magic potion” that will allow the greenback to lose its position as the world’s reserve currency. The digital yuan is part of China’s drive to become a cashless society and is issued and controlled by the country’s central bank.
Such a phenomenon will occur although it will take “a very, very long time”, Roche said: “Do not be in a hurry to play this particular theme because I think the dollar will sit there for a while.”
Still, Roche suggested that reserve currency status tended to be “undeserved”.
“The US economy has been shrinking progressively over the past two decades with a smaller proportion of international trade,” he said. “Still, the dollar accounts for an increasing proportion of international trade and an even greater proportion of financial reserves.”