Demise of US dollar as world currency

Experts see demise of dollar as world currency

 By DORIS C DUMLAO and MICHELLE V. REMO

IT may only be a matter of time before the US dollar gets replaced as the main currency in international trade, according to economists attending the meeting of the board of governors of the Asian Development Bank (ADB) in Manila.

Asian Development Bank, ADB

For many years, the dollar “has been almost the sole ‘reserve’ currency,” banked on by the world economy, American economist Jeffrey Sachs said on Thursday in one of the forums held during the ADB annual event. “Going forward, (the dollar) can’t play that role anymore.”

Sachs added that he could not see how the US dollar could remain as the world’s reserve currency when “the role of the United States in the global economy is diminishing.”

Several finance experts echoed Sachs’ sentiment, explaining that, with the greenback expected to weaken further, the world should turn to another currency to facilitate international trade and other commercial transactions.

“Having another reserve currency other than the US dollar is only a matter of time. We don’t know exactly when it will happen, but it will,” Neeraj Swaroop of Standard Chartered Bank said in an interview at the sidelines of the ADB meeting.

In the area of merchandise trading, Swaroop said, countries have actually started to use currencies other than the US dollar.

Sachs also said that some countries could turn to more than one currency in maintaining their foreign exchange reserves.

One currency being considered is the Chinese renminbi (RMB) which, according to HSBC, will inevitably become an international reserve currency.

The renminbi, or yuan, has the potential to become an international reserve currency because China is continuing to post strong growth, becoming an important player in the global economy, Iwan Azis, ADB head for regional integration, said in the same forum.

Also, China is pushing to make the yuan the world’s reserve currency – a move that is seen to hasten the replacement of the US dollar, Azis added.

Already, British banking giant HSBC has mapped out a strategy to be a leading global player in the “renminbi banking” space.

This global strategy has filtered into the Philippine market with the bank’s introduction of RMB-denominated deposit and trade financing facilities, top HSBC officials said in a press briefing on Thursday.

Spencer Lake of HSBC said the renminbi was increasingly becoming an important currency from a trade perspective.

Lake was in Manila as head of the HSBC delegation to the ADB event.

“If it were freely convertible today, it will be the second-largest currency in the world,” Lake said, noting that China has started to liberalise currency systems.

“It’s part of our core strategy to adopt and put in place all of the infrastructure and products to embrace (the renminbi) as a future reserve currency,” Lake said.

Lake said the bank’s strategy appeared to be gaining ground as indicated by a “significant” buildup of the RMB business in Hong Kong, Singapore and other South-East Asian countries.

“The world is getting ready to adopt it as a world currency,” he said. “You’ll see it as a more common language.”

“Reserve” currency, which is currently used to describe the US dollar, is the denomination that accounts for bulk of the foreign exchange reserves of most countries.

A country taps its foreign exchange reserves whenever it needs to pay off the costs of imported products and debts to foreign creditors.

After the United States fell into a recession in 2009, the US dollar began to weaken against emerging market currencies.

The trouble with hanging on to the dollar as the main reserve currency is that it is prone to depreciation given the prevailing economic troubles of the United States.

Depreciation of the US dollar, in turn, may lead to a reduction in the value of a country’s foreign reserves, experts said.

Apart from the yuan, Sachs said other viable currencies that could replace the US dollar were the euro and the Japanese yen. — Philippine Daily Inquirer / Asia News Network   

China says it can’t use forex reserves to save Europe

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BEIJING: Europe cannot expect China to use a big portion of its US$3.2 trillion foreign exchange reserves to rescue indebted nations, a top Chinese foreign ministry official said, Beijing's strongest rebuttal yet to suggestions it should bail out the eurozone.

Vice-Foreign Minister Fu Ying said at a forum the argument that China should rescue Europe did not stand and that Europeans might have misunderstood how China managed its reserves.

She did not explicitly rule out using part of China's reserves for more targeted measures, but implied China was not going to ride in with a big chunk of its “savings” and bail out crisis-stricken Europe.

“We cannot use this money domestically to alleviate poverty,” Fu said. “We also can't take this money abroad for development support.”

Economists estimate that Beijing has already invested a fifth of its reserves in euro assets.

While the size of China's reserves is the largest in the world, analysts say two-thirds of that is locked up in dollar assets that cannot be sold, giving Beijing a more modest portion of about US$470bil to invest each year.

Fu said China's reserves were akin to the country's savings and that the 1997 Asian financial crisis taught Beijing how important reserves were to the nation.

China's foreign ministry does not exert direct influence over how the country invests its foreign exchange reserves but can comment on that policy.

Fu said Beijing's refusal to use its reserves to ease Europe's debt woes did not count as a lack of support for the region, which was also China's biggest export market.

“I say the idea that China should save Europe does not stand. What I mean is the money cannot be used this way,” Fu said. “China has never been absent from any international efforts to help Europe. We have always been an active participant, and a healthy particpant as well.”

As the owner of the world's largest foreign exchange reserves, China is one of the few governments with pockets deep enough to buy a sizeable portion of European government debt and help pull the region from its economic malaise. - Reuters

China says it can't use forex reserves to rescue Europe

02-Dec-11, 8:41 PM | Agence France Presse

BEIJING - China's vice foreign minister on Friday ruled out using the nation's vast foreign exchange reserves to bail out Europe, as the debt-laden continent tries to stave off the risk of a massive default.

"The argument that China should rescue Europe does not stand," vice foreign minister Fu Ying told an EU-China forum.

"We cannot use foreign reserves for... rescuing foreign countries. We need to ensure safety, liquidity and profit for the foreign reserves."

European leaders have lobbied China, the world's second largest economy, to help struggling eurozone countries by contributing to a bailout fund, but so far Beijing has not made a firm commitment.

The Asian powerhouse, which has the world's largest foreign exchange reserves at $3.2017 trillion, has said it is keen to seek more investment opportunities in Europe, but has held back from agreeing to contribute to the fund.

Fu pointed to China's purchase of European bonds, increased imports and expanded investment in the continent, which would "create jobs and restore growth".

But she insisted China was not seeking to use its considerable financial clout to exert power over the continent.

"China is no old-fashioned power or empire. China has no intention of seeking power through financial means," she said.

China's commerce minister Chen Deming said last month Beijing would lead an investment delegation to Europe next year, and the head of China's sovereign wealth fund has said it is keen to invest in European infrastructure.

But some in Europe have expressed concern about the potential cost of accepting Beijing's help.

In October, Francois Hollande, the Socialist candidate for next year's French presidential elections, asked if China was really "riding to the rescue of the euro... without making any demands in return?"

Fu also reiterated China's confidence in Europe, just as European leaders prepare to meet at a summit next week that some have billed as their last chance to restore the credibility of eurozone economic governance.

"We have reason to believe that Europe has the wisdom, capacity and resources to make it this time by accelerating adjustment and reform," she said.

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Is China still a developing nation? 

China Needs Urgent Review of U.S. Debt, Financial News Says

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By Bloomberg News (Updates with central bank governor’s comment in third paragraph.)

Aug. 11 (Bloomberg) -- China should urgently assess risks from being the main foreign investor in U.S. debt and diversify its foreign-currency reserves more quickly, the Financial News reported today, citing Xia Bin, a central bank adviser.                                      Image via Wikipedia

In the short term, China can adjust the structure of the reserves, the central bank publication cited Xia as saying. Longer-term, the key is to keep foreign-exchange holdings at a “reasonable” level, according to Xia, an academic member of the monetary policy committee of the People’s Bank of China.

Central bank Governor Zhou Xiaochuan pledged this month to “closely” monitor U.S. efforts to tackle its debt burden. The global stock market rout that saw Tokyo shares sliding this morning follows Standard & Poor’s downgrade of the U.S. debt rating from AAA and a widening of Europe’s sovereign-debt crisis.



China is the biggest foreign owner of U.S. Treasuries, with more than $1 trillion of the securities, and its foreign- exchange reserves are the world’s largest at more than $3 trillion.

The U.S. economy has entered a long cycle of economic weakening that will put pressure on China’s holdings of dollar assets, Xia wrote in a microblog on Aug. 6. He is the director of the Finance Research Institute at the Development Research Center of the State Council, China’s cabinet.

China should buy more non-financial assets with its reserves to diversify risks, Xia wrote, adding that the country should also pursue national strategic interests, and seek to globalize the yuan. He previously said that China should use its reserves to increase holdings of gold and some other precious metals.

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net --Zheng Lifei. Editors: Paul Panckhurst, Nerys Avery.

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US Dollar’s Share Of Global Reserves Continues To Slide, Reserve Status Questioned

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Dollar’s Share Of Global Reserves Continues To Slide, Reserve Status Questioned

 Timmy Geithner and Bennie Bernanke have contributed to the dollar's decline - Getty Images North America.

WASHINGTON - APRIL 21: Treasury Secretary Timothy Geithner (L) and Federal Reserve Chairman Ben Bernanke applaud during the unveiling of the new $100 note in the Cash Room at the Treasury Department April 21, 2010 in Washington, DC. According to the Treasury Department, the U.S. government evaluates advances in digital and printing technology to redesign currency and stay ahead of counterfeiters. The new note will be put into circulation in Feburary 2011.

Further confirmation that the U.S. dollar is gradually losing its reserve status came today from an International Monetary Fund report on global holdings of foreign exchange reserves by central banks.  The greenback, and the euro, lost share vis-à-vis the Japanese yen, the Australian, and the Canadian dollar, pointing to a “slow, gradual diversification” of reserve holdings.

With Christine Lagarde recently appointed General Manager in replacement of the disgraced Dominique Strauss-Kahn, the IMF released its latest “Composition of Official Foreign Exchange Reserves” (COMFER) which lists reserves held at central banks in 33 “advanced economies” and 105 “emerging and developing economies.”  China, one of the largest holders of foreign reserves, is not included in the sample. (Read IMF Appoints Lagarde To Fix A Disgraced institution).

Attesting to the continued global loss of confidence in the U.S. dollar, the greenback’s share of the world’s reserve continued to slide in the fourth quarter of 2010, the latest data show.  Interestingly, the trend can be explained entirely by valuation effects, with the trade-weighted dollar depreciating 4%% in that time frame.

The U.S.’ share of allocated reserves fell in the first quarter to 60.69%% from 61.53% from Q4 2010.  Central Bank reserves move slowly, but the slide in the greenback’s share, which Nomura suggests would be even steeper if China was included in the sample, has been very pronounced if one takes a longer-term window.



A year before the latest data, Q1 2010, the greenback’s share stood at 61.64%, while in Q1 2001, ten years before, it stood at 72.3%.  While USDs dominance was unquestioned a few years ago, it is anything but rare to speak of a move toward a multi-currency system, with the dollar still a primus inter pares [first among peers]. (Read Central Banks Dump Treasuries As Dollar’s Reserve Currency Status Fades).

Emerging and developing nations aggressively accumulated foreign reserves in the first quarter, as their high-growth economies attracted massive capital flows from so-called advanced economies.  While rich nations added $65.5 billion in reserves, $1.6 billion of those in U.S. dollars, emerging markets added $366.3 billion, $65.8 billion of those in dollars.  Regardless, EM central banks also sought further diversification, with the Japanese Yen as the main destination.

Emerging market central banks accumulated $6.6 billion in new JPY reserves in the first quarter, taking their allocation up to 2.9%.  “While the increase appears small, it signifies that the yen has recently found favor amongst EM central banks as an alternative safe haven,” noted Nomura.

“Other” currencies, as denominated by the IMF, made up 20% of emerging market reserve accumulation in the first quarter.  With the Canadian and Australian dollars as some of the biggest beneficiaries, the share of “other” currencies climbed up to 5.8%, from 5.1% in Q4 2010.

Euro share of global reserves crawled up a couple of percentage points to 26.6%, despite being shunned by EM central banks (where its share fell to 28.2%).  With the euro gaining 5.8% against the dollar in the first quarter, the data indicates EM’s actively selling euros.  “It is likely that central banks sought to rebalance their reserve portfolios in the wake of EUR strength and corresponding USD weakness. That is, they sold EUR and bought USD and other currencies to counter the sharp change in valuation,” explained Nomura’s analysts.

The IMF’s most recent COFER continues to support the thesis that the U.S. is losing its reserve status.  Central banks are sticking to “relatively stable allocations of major currencies,” namely the U.S. dollar and the euro, yet they are gradually moving away, adding yen and “other” currencies.  While the greenback will continue to play a predominant role in world trade, there can be no doubt that slowly, but surely, central banks will rely less and less on it.