Is it the end of Dollar as world's reserve currency?
What is Reserve Currency?
A currency, held in considerable quantities by different governments, as part of their foreign exchange reserves. It is also used for the products traded in global markets such as oil, gold etc. Reserve currency is also called as ‘Anchor Currency’.
US Dollar as Reserve Currency:
Traditionally, US Dollar has been regarded as the reserve currency and for more than 50 years it has been the currency of choice used by various nations of the world to facilitate trade involving commodities such as petroleum, manufactured products and gold. This stature has had tremendous benefits for the U.S. financial system and ...view middle of the document...
A lot of this threat emanates from China, world’s 3rd largest economy. Seventy thousand Chinese companies are now doing their cross-border settlements in Yuan and thus freeing themselves from undertaking the foreign exchange transactions. Allowing Chinese banks, for their part, to do international transactions in Yuan will allow them to grab a bigger slice of the global financial pie.
Also, the status of dollar being safe haven is now lost mainly due to the financial crisis and the federal debt approaching 75% of US GDP.
Reasons for decline of US Dollar as Reserve currency:
Dollar Value Share of foreign exchange reserves (percent) http://www.piie.com/blogs/realtime/?p=2805
From the above graph, it is evident that the share of US Dollar as the world’s reserve currency is facing a gradual fall and has come down from 75 % in late 90’s to around 58% in the last quarter of 2011.
The same duration saw growth of Euro as emerging Reserve currency.
Euro Value Share of foreign exchange reserves (percent). http://www.piie.com/blogs/realtime/?p=2805
Also, last few years have also seen increasing use of Yuan in settling Chinese trade. Following shows the growing trend from the Q1 of 2010 to Q4 of 2011.
So based on these figures and statistics, we can enumerate some the reasons for the decline of Dollar as Reserve currency.
1. Dumping of Dollar as the reserve currency used for the trade by the Chinese, Japanese and BRICS nations.
2. Chinese and the Russians have been using their respective currencies for trade.
3. China and UAE have decided to ditch US Dollar and to use their own currencies in oil transactions.
4. Despite sanctions against Iran by the Western world, the trade with Iran continues to be important aspect of many nations. Indian and Iranian deal of payment in Gold for the oil transaction is one such example of that.
5. Increased stress from international institutions like IMF and UN pitching in for the emergence of a new world currency.
6. China is the largest importer of oil from the Saudi Arabia, importing 1.39 million barrels of oil every day. Also there has been considerable Chinese investment in Saudi Arabia for the development of oil refineries. Hence, there is a possibility that this growing partnership will take deal away from petrodollar.
Impact on US Economy: