Global currencies

Euro must adapt to fend off yuan

yuan
Despite its recent ups and downs, the yuan could soon challenge the euro on the global stage.
  • Why it matters

    Why it matters

    Being in control of a recognized global currency has many benefits, including being able to buy commodities anywhere, supply and withdraw liquidity and intervene in foreign currency markets.

  • Facts

    Facts

    • The International Monetary Fund currently recognizes four global currencies: the US dollar, the euro, the British pound and the Japanese yen.
    • In 2014, U.S. dollars accounted for 63 percent of international foreign currency reserves, the euro 22 percent and the British pound and Japanese yen 4 percent each.
    • If added, the Chinese yuan would take third position on the list and quickly close in on the euro.
  • Audio

    Audio

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The International Monetary Fund, presumably under pressure from the United States, recently declined to add the Chinese yuan to its basket of reserve currencies.

But the move was far from permanent. The IMF normally reviews and adjusts the basket, which currently includes the US dollar, the euro, the British pound and the Japanese yen, every five years. To give the financial markets time to anticipate possible changes, the review date was postponed by nine months this time, so that adding the Chinese currency will again be a possibility in October 2016 at the earliest.

Admission to the currency basket is important for China. Its government is familiar with the benefits of a domestic currency being a global one. Countries that issue a reserve currency can use their money to buy commodities, consumer goods and capital goods almost anywhere.

They can provide the world with liquidity or withdraw it, and they are able to influence exchange rates by intervening in foreign currency markets. A reserve currency can also serve as a safe-haven currency for investors.

Seigniorage revenues, which are earned when a central bank produces money that is worth more than it cost to create, are especially important. These profits increase with a currency’s growing acceptance.

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