A bipolar currency order is closer than you think

The five most dangerous words in economics are “this time things are different.”

Except, when they really are. A case in point is how the unlikely strength of the Chinese yuan is reordering global currency market dynamics. And, perhaps, creating a new power-sharing arrangement between the two biggest economies.

“A striking feature of the turmoil of the past year is that it is the first major global economic dislocation in which China has allowed its currency to strengthen, rather than keeping its value pinned in a very tight range,” says economist Wei He at Gavekal Research.

Part of the yuan’s 10.5% gain over the last 12 months is a mechanical response to a weakening dollar. The yuan could now be near the top of the trade-weighted range that Beijing is comfortable with. As long as the dollar continues to drift lower, strategists say, the yuan may keep rising against it.

But taking a longer-term view, He says, “we have probably passed a key inflection point in the renminbi’s development into an international currency. Over any timeframe between the last 12 months and the last 10 years, the renminbi has been the best-performing major currency on a total return basis.” …

And given America’s near US$30 trillion debt load and gridlock-plagued government, the yuan seems destined to eclipse the dollar sooner rather than later.

This is very much Ray Dalio’s view. The founder of the globe’s biggest hedge fund, Bridgewater Associates, argues the yuan will supplant the dollar as the global reserve currency sooner than the conventional wisdom believes. Dalio, too, is betting that the digital yuan will turbocharge demand for China’s currency.