Wednesday, January 12, 2011

A Crack in the Dollar's Reserve Currency Status?

Randall W. Forsyth points to two recent developments as part of a broader change in the global monetary system:
The new world monetary order continued to evolve with two separate developments Tuesday.  Japan said it would join China in buying debt securities to support beleaguered European sovereign creditors. In so doing, the world's No. 2 and No. 3 economies were acting to try to hold together the euro as a viable alternative to the world's reserve currency, the dollar, from the No. 1 economy, the U.S.  At the same time, China permitted trading of the renminbi in the U.S. for the first time -- a significant step in the RMB becoming a full-fledged international, convertible currency...[These two developments] are both part of the loosening of the global monetary system away from its dollar-centric mooring.
Maybe so, but there there are many hurdles for alternative currencies to clear before there arises any meaningful threat to the dollar's reserve status.  Just look at the dominance of the dollar in the global forex market over the past three years.  Even when this change in the globlal monetary system does come about, Barry Eichengreen believes the dollar will still be a dominant currency in the global economy. For better or for worse, then, the Federal Reserve will continue to be a monetary superpower for some time.

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