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February 28th 2005

An end to the USD as the World’s Reserve Currency?

Rumors that South Korea is planning to diversify its foreign exchange reserves are abounding. If these rumors are borne out, the dollar’s role as the world’s reserve currency could be numbered. As the USD continues to depreciate, so do the dollar-denominated reserves of many (Asian) nations. Is a massive sell-off of dollars imminent? In the short term, the answer is no, as there is no viable alternative reserve currency to the dollar. The EURO represents the only other currency that one could even argue deserves reserve status.  In reality, the short and medium-term prospects for the Euro area economy are not great, and the region’s population may actually decrease before it increases.

The EU would love nothing more than for the EURO to function as a reserve currency, for it would allow the region to borrow money at extremely low rates. However, countries currently fix their currencies to the Dollar- not the Euro. It is possible that these countries will eventually peg their domestic currencies to a basket of foreign currencies, but exchanging all or even most of their USD for Euros would be logistically impossible. In addition, the USD is and will continue to be the world’s most important currency. Many, if not most exchange rates, are quoted exclusively in dollars. US capital markets are the most liquid and dependable in the world. Global commodity prices are always denominated in dollars, and are usually paid for in dollars, even if the United States bears no involvement in the transaction. Some analysts predict the Chinese Yuan (RenMinBi) will one day become an important currency, especially if China’s economy continues to grow. The London Telegraph reports:      

…the euro will never become equal to the dollar as a reserve currency. In the very long run, the most likely candidate for that role, and even to surpass the dollar, is the renminbi.

Read More: Should the euro be the reserve currency?

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Posted by Adam Kritzer | in Euro, US Dollar | 1 Comment »

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One Review of “An end to the USD as the World’s Reserve Currency?”

  1. Reema Says:

    The chances of Yuan becoming world reserve currency are also very less. Reason – China’s capital markets are not as open or dependable as the US’. Also, for any given nation it would be harder to trust its reserves to Chinese currency given that China is not very forthcoming in releasing its economic data. One never knows what is going on behind the screen in China. Hence, I think that Euro is probably more viable compared to RenMinBi.

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