text: InFocus: When in Doubt, Zoom Out: A Look at the Strategic Monetary PictureThis week was a watershed moment for the US Dollar. Not because Western-backed sanctions are pushing Russia closer to China, but because more Americans are starting to understand threats to the long-term sustainability of the US Dollar (USD) as the world reserve currency.A brief history of Russian and Chinese financial/monetary cooperationEven before February, Russia and China had already been cooperating to circumvent inevitable sanctions. In 2019, for instance, Russia and China reached an agreement to build an alternative to SWIFT, the international payment messaging system from which Russia has been removed. A year later, the two declared a “financial alliance” to reduce their trade dependence on the dollar. The results are substantial. In 2015, Russia and China settled about 90% of their bilateral trade in USD. They finished 2020 at about 46%, even as their bilateral trade totals increased. A year later, in December 2021, Russian officials announced that the countries would “intensify efforts to form an independent financial infrastructure to service trade operations between Russia and China.” This is no doubt spurred on by China’s vulnerability to similar sanctions, which they could incur around a military action against Taiwan. For China, the lesson is simple: reduce the impact of financial exclusion by building an alternative system.Trajectory of the USD Dollar stability has been very attractive to foreign investors and banks. This is why we saw inflows into the USD and dollar-denominated assets during the pandemic of 2020, as foreign investors sought safety. There are a few reasons for this stability. First, the USD is backed by American hard power, soft power, and vast natural resources. Second, American capital and credit markets are the largest in the world. Doing billions in business in USD is easier compared to other currencies, and global vendors buying and selling in USD provide trade liquidity. And third, there simply are no competitors. No country on earth has capital and credit markets large enough to maintain a world reserve currency. For nowHere’s a chart I shared with you back in June 2021, which shows the share of currencies held by foreign central banks. In 1999, just after the creation of the Euro, the USD represented over 70% of foreign bank reserves. About 20 years later, that number had fallen to 59%. Meanwhile, the Chinese yuan accounts for about 2-3% of foreign bank reserves right now. Morgan Stanley predicts that the yuan will be 5-10% of global reserves by 2030.