Yes, yes, I know it sounds ridiculous… The thought of the scrilla being replaced as the world’s reserve currency seems totally absurd!
After all, the dollar has kept its hold on the title ever since the end of the Bretton Woods Agreement.
During that time, the U.S. has only reinforced itself as the world’s biggest and baddest (as some would argue) economy in the world. In addition, the dollar has benefited from its status as a safe-haven currency.
Recently though, the dollar has been losing its share in the forex reserves of other nations. From a high of about 70% in 2000, the ratio has now fallen to about 60%.
Could it be that other nations are warming up to the idea of having another reserve currency? Here are three “currencies” that could take the spotlight away from the dollar:
Why renminbi could replace the dollar
As Japan’s GDP report for the fourth quarter of 2010 confirmed that China is now the world’s second biggest economy, talks about the renminbi becoming THE next reserve currency also swirled in the markets.
No way, you say?Well, we can’t really blame those who have already been smitten by the Chinese currency.
I mean, it looks like China has become the NEW land of opportunity, with a handful of businesses trying to penetrate its market.
So it shouldn’t be much of a surprise to see the renminbi popularity increase in international business and financial transactions.
Could this be the start of the renminbi’s rise in the reserve currency strata?
Why renminbi can’t replace the dollar
Err, I wouldn’t hold my breath for that if I were you.
In order for the renminbi to pose a serious threat to the dollar, the Chinese government has to assure investors that it can handle not being too overprotective of the currency.
So I guess it’s safe to say that until Chinese officials allow it to be freely converted, there is no competition between the renminbi and the dollar.
Why euro could replace the dollar
Don’t look now, but the eurozone is slowly catching up to the U.S. in terms of GDP. Of course, the eurozone has the advantage of being a ZONE and having a boatload of countries contributing to its GDP.
But don’t you see? That’s the whole point!
The fact that a lot of countries are using the euro gives reason for countries to load up on their euro reserves. Remember that in international trade, countries use their national reserves to help facilitate trade. This is precisely why the dollar is the world’s reserve currency – everyone trades in dollars!
Take note though, that more and more central banks are moving in the direction of the euro. The euro now accounts for about 25% of all currency reserves, and it’s a figure that will likely continue to rise in the coming years. In addition, countries like Japan and China have already begun unloading some of their other reserves in favor of the euro.
Why euro can’t replace the dollar
The biggest reason why the euro may have difficulty supplanting the dollar is due to sovereign debt fears.
This is the same reason why the euro has been so volatile over the past couple of years – no one knows what will happen. If it turns out that more countries need bailouts, it would greatly diminish the value of the euro and who would want it then?
That’s right. You’re hearing cricket sounds. Nobody.
IMF Special Drawing Rights (SDRs)
The Special Drawing Rights, commonly called SDRs, were created in 1969. One SDR used to be equal to .888671 grams of gold, but after the breakdown of the Bretton Woods system, the value of the SDR was redefined.
Now, the SDR’s value is based on a basket of currencies; namely, the Japanese Yen, the U.S. dollar, the British Pound, and the euro.
The weight of each currency on the SDRs value is reassessed every half a decade. I guess you could say that the SDR is the closest thing to a global currency we have as of the moment.
Why SDRs could replace the dollar
The great thing about the SDR is that it is not dependent on anyone’s economy for its value. Because of the SDRs’ “global value,” the risk of exchange rate swings in global trade is greatly reduced.
The SDR unit, for example, could be used to easily set prices in global trade, denominate financial assets, peg currencies, and keep a very uniform account of statistics.
The SDR has also garnered a lot of support from China and Russia in the past. Both countries expressed their concern over the falling value of the dollar and wanted to have a currency that is more stable.
Why SDRs can’t replace the dollar
The main problem with the SDR is that the institution that issues it, the IMF, is not a bank. This implies that the IMF can ONLY lend and provide SDRs to governments and NOT to private markets.
Using SDRs to buy anything in the private market involves a lot of time and expense because you first need to convert them back to domestic currencies.
So there you have it folks – three “currencies” that could potentially replace the dollar as the king of the forex reserves! Which of three do you believe has the biggest chance of doing so?