The yuan reserve currency approval, announced today (Monday) by International Monetary Fund Managing Director Christine Lagarde, has sealed the fate of the U.S. dollar.
As of Oct. 1, 2016, the Chinese yuan will become part of the International Monetary Fund's basket of reserve currencies, joining the euro, the Japanese yen, the British pound, and the U.S. dollar.
The IMF yuan reserve currency approval ensures that the days of the dominance of the U.S. dollar are coming to an end.
"China's [yuan] is ultimately destined to replace the U.S. dollar as the world's primary reserve currency, while China's central government bond market will become the world's primary reference market for fixed income," Jan Dehn, head of research at Ashmore Group, wrote in a research note.
Dehn explained that given the size of China's economy and its high rate of growth relative to the U.S. economy, this outcome is "inevitable."
Yuan Reserve Currency Status Was Long-Planned
The IMF yuan reserve currency approval is the latest step in China's decades-long strategy to replace the U.S. dollar as the world's primary reserve currency, a status the dollar has held since edging out the British pound in the middle of the last century.
Most financial news outlets are downplaying the news, assuring investors that nothing will change in the short term. While that's true, things very surely will change over the medium and long terms. And for the U.S. dollar, those changes become increasingly grim as time goes on.
Even before the yuan reserve currency approval becomes official next October, we'll start to see changes.
At least 10% of global foreign currency reserves – $1 trillion – will switch into the yuan practically overnight, mostly at the expense of the U.S. dollar.