Will USD Remain The Global Reserve Currency?

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Will USD Remain The Global Reserve Currency?

Appetite to create global reserve bank to issue the currency and monitor national exchange rate is brewing. In early 2009, the BR IC’s proposed replacing the US$ as the main reserve currency following the financial crisis due to the collapse of US mortgage market that led to the worst global recession since World War II.

Also, the economic power is shifting from G7 countries that saw increasing acceptance of the other economies currencies. And if US recovery is weak, rates will remain low, thus pressuring the US$ to stay weak.

Latest IMF report on global reserves currency composition showed USD holding dropped to 62.8% in 2Q2009 from 65.0% in 1Q2009 the lowest since 1995 has some level of exaggeration to suggest liquidation of US$ by the central banks. (Table 1) First, a large portion of the shift in US$ holding is due to weak US$ itself. It boosted the US$ value of those reserves held by other currencies. Second, there is no clear indication that China will turn its back on US$, with US$2trn reserve composition unknown and US Treasuries holdings of US$800bn in July from US$780bn June. ( Chart 1 ) Third, the USD depreciated significantly since 2001 did not trigger large scale diversification.

Lately, the United Nations proposed reducing using US$ in global trade and establish a new currency to protect emerging markets from the ‘confidence game’ of financial speculation. We think this may not happen that soon, although we are not ruling out the possibility of it ...

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