Growing uncertainty about the dollar’s dominance in global markets is largely misguided, and it’s unlikely alternative currencies can take over, venture capitalist Chamath Palihapitiya said.
“This whole thing is a huge nothingburger,” the so-called SPAC King said on a Friday episode of the All-In Podcast.
Speculation that the dollar is a waning has grown as Western sanctions cut off Russia from its foreign currency reserves after Moscow’s forces invaded Ukraine last year.
That spurred other countries to rethink their reliance on the US currency. In the past two months, the yuan surpassed the dollar as the most traded currency in Russia, while China also signed an agreement with Brazil to use renminbi for cross-border transactions. Beijing has also pushed the yuan as currency to settle oil deals as well.
But news like that is not enough to signal the end of the dollar’s role, especially as the yuan is still linked to the greenback to some extent, Palihapitiya said.
The yuan isn’t strictly pegged to the dollar. Rather, it trades in a 2% range around a midpoint against the greenback, fixed daily by the People’s Bank of China.
And although the PBOC usually aims to maintain a rate of 7 yuan per dollar, the tight control gives China some leeway to pull the yuan’s level into desired directions, if need be.
“Until [the yuan] is unpacked in a free floating currency, we will never know what the real market clearing price is,” Palihapitiya said. “China has been very effectively able to manipulate this currency since they were brought into the WTO, in order to engender that trading partner status.”
He later added that, in moments of financial crises, the dollar will remain the “canonical” flight to safety, outside of commodities such as gold.
Similar to Palihapitiya’s take, a Carson Group note from last week outlined that the US dollar would remain the central currency as there was no other good alternative.
Not only that, but trust in the dollar has a historic backing, as the US is a top international trading partner that would be difficult to dislodge while the market for US Treasurys remains attractive.