Is the almighty dollar dying?
With the rise of China as a significant world-economic power, many folks wonder whether the US Dollar’s days as the global reserve currency are numbered. After all, China is growing three times as fast as the US; the Euro-zone is almost as big as the US; and many trade-surplus countries are seeking ways to diversify their exposure to the Dollar.
All three currencies face challenges. The Dollar is facing enormous trade and budget deficits; the Euro lacks a mechanism for resolving fiscal imbalances; the Chinese Renminbi lacks a liquid market and adequate investible securities. But the Dollar is on top right now, by virtue of its history and its liquidity. There isn’t another viable competitor.
Still, if the Euro and the Yuan overcome their difficulties, what would it mean? We might go from a single reserve currency to a triad. It would be clear that the availability of the other two would keep each currency in check. If budgets remain unbalanced for too long, or if a banking crisis loomed, that currency could fall, potentially disciplining politicians. A post-dollar world might be more stable.
Does the Dollar’s status as the global reserve currency confer any advantages? There are a few. But they come at the cost of an overvalued currency. This in turn has penalized our most competitive industries, and its only now being somewhat corrected.
The Dollar’s role in the global economy is changing. But that doesn’t mean decline. Accountability and healthy competition strengthen everyone.
Douglas R. Tengdin, CFA
Chief Investment Officer
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