Fed Turmoil Is Threatening Dollar Supremacy Just as China Pushes the Yuan
Economists see a politicized central bank damaging confidence in the U.S. system while Beijing advances in globalizing yuan
By Rory Jones
SINGAPORE—One potential beneficiary of the tug of war over the Federal Reserve’s independence: China.
The criminal investigation into Fed Chair Jerome Powell is being viewed globally as an effort by the Trump administration to wrest control of monetary policy from the central bank.
That, according to some economists, risks damaging investor confidence in the U.S. financial system and the dollar, just as China is expanding use of its own currency around the world.
“The institutional setup of the U.S.—through actions like those against the Fed—is being undermined,” said Bert Hofman, a former World Bank country director for China now teaching at National University of Singapore.
“Holding dollars becomes a relatively less attractive proposition as a form of safety.”
China’s push to globalize its own currency—recently given renewed importance by Beijing in a five-year policy plan—has already alarmed officials in Washington.
Before entering office, President Trump warned about China’s push to globalize the yuan and has since threatened tariffs on the Brics bloc of emerging-market countries—which includes China—should they create an alternative to the dollar.
Wider use of the yuan could also allow adversaries to avoid the scrutiny of the dollar-based financial system.
“If we lost the world standard dollar, that would be like losing a war,” Trump said in a cabinet meeting in July.
Since it became the world’s dominant currency in the post-World War II era, the dollar has weathered many crises before, in part because there is no obvious replacement.
China’s strict controls over capital and exchange rates make it unlikely that the yuan could fill all the roles the dollar plays now, and even Beijing’s leaders don’t say they want that.
More widespread use of the yuan could push up demand and the value of the currency versus the dollar, eroding China’s competitive advantage and hurting its exporters.
Instead, with gradual steps, Beijing is competing with the U.S. for global influence by chipping away at the dollar’s ubiquity in certain areas such as bank payments.
The dollar reigns in part because countries and companies consider the U.S. political system stable and appreciate having reliable places to park their extra dollars, especially U.S. Treasurys.
Political control of central banks in countries such as Turkey has led to high inflation, which, if repeated in the U.S., would undermine the role of U.S. government debt and reduce confidence in the dollar.
The Powell news pushed up already-skyrocketing prices of gold and silver, which have benefited over the past year from buying by inflation-fearing investors.
A loss of Fed autonomy could spook investors further.
“It would sow the seeds, effectively, of the demise of dollar dominance,” said Ray Attrill, head of foreign-exchange strategy at National Australia Bank in Sydney.
Trump has said that the criminal investigation into Powell isn’t related to disagreements he has had with the Fed chair over lowering interest rates.
The president wants favorable interest rates to stimulate the U.S. economy, and he is also lowering taxes and loosening regulations.
If successful, Trump’s moves could strengthen the dollar and cement its global role by drawing investors to what he calls “the No. 1 economy on earth.”
He said this month, “We’re already growing double, triple and even quadruple the speed of almost every other major economy on earth.”
Alternative to U.S.
China is expanding its yuan-dominated financial payments network as an alternative to the U.S.-led Swift system.
It is lending more to developing nations and encouraging international firms to issue bonds denominated in the Chinese currency, creating a market of investible securities in the yuan.
And Beijing is promoting Shanghai as a global hub for storing physical gold denominated in the currency.
Roughly half of China’s cross-border transactions are now denominated in its own currency, compared with almost nothing 15 years ago, according to official data.
Chinese officials want the yuan to “be perceived as a strong currency that is used more globally,” said Shuang Ding, a Hong Kong-based economist at Standard Chartered and former Chinese central-bank official.
For now, global use of the yuan is dwarfed by its U.S. counterpart.
The dollar makes up 47% of payments using the Swift network, and 80% of trade finance, compared with 3% and 8%, respectively, for the yuan, according to Swift.
Some countries are increasingly using China’s Swift-like payments system.
The platform, known as the Cross-border Interbank Payment System, or CIPS, has become the bedrock of money flows between Beijing and Moscow since the war in Ukraine, when U.S.-led sanctions cut off Russia from the Western financial system.
Those penalties highlighted for many countries the risks of dependence on the dollar-based financial order and the appeal of alternative payments systems.
CIPS has nearly doubled its daily transaction volume and value since the war in Ukraine, according to Chinese central bank data.
“The Americans are waking up to the reality,” said Chi Lo, a market strategist for BNP Paribas Asset Management in Hong Kong.
The yuan is “now becoming a force that they cannot ignore,” he said.
China is competing for influence with the U.S. by extending loans in yuan to developing countries in Washington’s orbit.
This includes Argentina, where the U.S. has tried to temper Chinese financial power over the past year.
China also gave yuan loans to Venezuela under Nicolás Maduro—although that experiment ended badly for Beijing when the U.S. ended his rule.
The share of overseas lending by Chinese financial institutions in yuan grew to 45% of a total 2 trillion yuan, equivalent to about $290 billion, outstanding at the end of 2024, according to China’s central bank.
That share was less than 10% a decade earlier, according to the International Monetary Fund.
Capital controls still limit the yuan’s adoption because overseas countries and companies fear being stuck with a currency that isn’t easily exchangeable.
China has an offshore version of its currency that can be freely traded in hubs like Hong Kong and London.
But its attraction has been limited because investors historically have had few assets to buy.
Addressing that issue, Beijing is now promoting issuance of yuan-denominated bonds in offshore hubs—what are known as “dim sum bonds.”
International firms have recently raised debt, taking advantage of lower interest rates in China compared with the U.S.
The proliferation of yuan-denominated assets is allowing Chinese trading partners such as oil producers to earn a return on the yuan they receive, with the confidence they can get out when they need to.
“The dim sum bond market is growing like crazy,” said Alicia Garcia Herrero, an economist at the French bank Natixis and a professor at the Hong Kong University of Science and Technology.
“It’s very small still, but it’s offering” a market for yuan assets, she said.
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