The end of USD’s reserve currency domination?

on Aug 2, 2012 in Currency, Economy, Home | 1,563 comments

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How could the USD’s long time most favoured currency status be in jeopardy?

There is indeed great concern around the financial trajectory of the US economy. I expect that the outlook for the US fiscal position will weigh heavily on the USD in the quarters ahead. Consequently, the USD’s role as the world’s reserve currency has been called into question.

In the near term, however, a strengthening growth profile could help provide a temporary period of USD strength. In the long term, the prediction of a multi polar currency world replacing the current USD dominance is a plausible scenario.

Today, more than 60% of all foreign currency reserves in the world are in USD. But there are big changes on the horizon.

The BRICS continue to flex their muscles and use of their own national currencies with their respective trading partners rather than the USD. 

Global growth over the next decade is likely to mirror the current sluggish recovery, with emerging countries growing faster than more advanced counterparts. Currency use remains dominated by the USD despite the growing importance of emerging markets.

I think it is still quite possible that this will only be a very gradual process and very likely that the USD will still play a key role in the world economy.

If the world is unwilling to continue to accumulate USD, the US will not be able to finance its trade deficit or its budget deficit. The implication is for a decline in the USD’s exchange value and a sharp rise in prices. We are reaching the end of the era of the USD centric global currency system. With global demand for USD’s falling, central banks around the world will inevitably reduce their USD reserves. That reduction further weakens the USD against other currencies and in turn drives up inflation.

Due to the current bearish market sentiment the stronger position of the USD is on my opinion a short term perception.