The Great Debate UK
It just won't go away, this needling worry about the U.S. dollar losing its coveted top-dog status.
No matter that there are plenty of reasonable arguments to support the dollar as the world reserve currency -- namely there's just no alternative -- for perhaps decades to come.
Yet, in a world where once-rock-solid assumptions quickly turn to dust, investors should keep an eye on the dollar since changing perceptions are chipping away at its cherished status as currency to world.
Much of the debate so far this year has centered on creating an alternative to the U.S. dollar, championed by China and Russia as a way to wean the world off its dependence on the U.S. as well as buffer individual nations against the missteps of those in developed world. Most recognize creating a new currency will take years and the chances of an existing currency, like the yuan, usurping the dollar anytime soon are remote.
Judging from the draft communique of the G8 leaders meeting in L'Aquila, no one is in a particular hurry to talk about ending the domination of the dollar in world currency reserves. Our correspondents at the Italian summit report that the debate being pushed by China and others is likely to be played down.
But the genie is out of the bottle. Beforehand, Beijing floated the idea of alternative to the dollar. Russia and Brazil weighed in with some thoughts. The United Nations also acknowledged earlier this year the desire of some countries for a "more efficient reserve system" in a series of proposals for global financial reform.
Reports that China has asked for a discussion about reserve currencies at next week’s expanded Group of Eight summit in Italy has added to confusion about whether the country wants to dethrone the dollar from its status as the world’s sole reserve currency. But the very fact the issue has been pushed onto the agenda suggests that a fundamental shift is underway.
Given the U.S. government’s enormous borrowing requirements over the next decade to cover the bank bailout, fiscal stimulus and deficits in Social Security and Medicare, the dollar’s reserve status depends on emerging markets’ continued willingness to accumulate U.S. liabilities rather than switching to other stores of value, such as the euro or the IMF’s Special Drawing Right (SDR).
from The Great Debate:
The dollar is, and will remain, the U.S.'s currency and its own and everyone else's problem.
The idea of creating a global currency, as espoused by China earlier this week, is interesting, has a certain amount of merit and is simply not going to happen any time soon.
from The Great Debate:
Perhaps the most surprising development over the last three months has been the surging value of the currency at the heart of the crisis. It is almost as if investors have responded to a fire alarm by running towards the source of the fire.
From a recent low on July 15, the U.S. dollar's trade-weighted value has risen 19 percent. The dollar has been broadly stable against China's yuan (+1 percent) while posting massive gains against the Swiss franc (+20 percent), the euro (+26 percent), the British pound (+35 percent) and the Australian dollar (+52 percent). Only against Japan's yen has the currency slipped marginally (-6 percent).