World Reserve Currency

By
www.TheForexNittyGritty.com

Most Forex traders view the US dollar as a safe haven
currency.

http://www.theforexnittygritty.com/forex/
world-reserve-currency

After all, the USD accounts for nearly two thirds of
foreign currency reserves held by the central banks of
the world.


The Euro holds second place with just under a fourth
of all currency reserves.


There are a number of advantages to the USA of
having what amounts to the world reserve currency.


Virtually all commodities are denominated in US
dollars. The USD is part of eighty-five percent of all
Forex trades.


Many foreign contracts are written in US dollars even
though the USD is not the home currency of either
party.


And, when the United States wants to borrow money
to finance its ever-growing debt, everyone still is willing
to purchase United States Treasuries with their
currency.


There is no risk in the short term that this situation will
change because of the fact that the US economy is far
and away the largest in the world.


However, there are a couple of concerns regarding the
status of the dollar as the world reserve currency.


These are the risk of debt default due to a
malfunctioning political system in the USA and
continuing long term devaluation of the USD.


Risk Hedging
versus
Speculation


Foreign currency trading serves two purposes.


First and foremost the Forex market exists to facilitate
international trade and the movement of wealth.


Companies that do business in the international arena
and people who earn their money in unstable regions
of the world prefer a stable currency for doing
business and storing wealth.


The second purpose is speculation.


Currency speculators do not especially care for stable
currencies.


Rather they would prefer that the USD is going up or
down but not standing still.


The status of the USD as the world reserve currency
affects its use in international trade and it especially
affects the use of the USD as a safe haven currency.


Short versus Long Term
Competition for World
Reserve Currency
Status


Given the economic weakness of the European Union
and speculation as to its breakup the Euro poses no
short term threat the USD as world reserve currency.


China is intent on making the Yuan an international
currency.


However, the Yuan exchange rate is fixed within a
government prescribed trading range.


And, the Yuan is to a large degree an instrument of
economic and political policy of the ruling Communist
regime in Beijing.


The Chinese economy is a fraction of that of the USA
and would need to continue its breakneck pace of the
last couple of decades to catch up.


And cracks are showing in the Chinese economic
miracle just recently addressed by the Communist
hierarchy. In all likelihood no one is going to want to
store value long term in Yuan when they can put all of
part in the USD, Euro, British Pound, or Swiss franc.


To be a world reserve currency means that the
currency needs to engender confidence.


The Euro is currently questionable. None other is as
strong.


And until China lets its currency float with the market it
will engender no confidence as a safe haven or world
reserve currency.


Threats to the USD as
World Reserve Currency


The USD will probably adjust downward a bit as the
Fed continues its quantitative easing program.


It may jump up as the Fed backs off and interest rates
go up.


But over time a weaker dollar will help the USA bring
manufacturing back home and stimulate the economy.


If the dollar continues to fall, year after year, it could
eventually be too cheap to be a world reserve
currency.


After all who wants to hold a currency that is on its way
to being worth pennies on the dollar?


This scenario is not likely to happen and certainly not
in the near future.


However, a viable threat is the current dysfunction of
the US government.


Those who wish to park their wealth in a stable
currency are not pleased to think that tomorrow they
will not receive interest on their US treasuries or that
the US could default on its sovereign debt.


To quote Abraham Lincoln,
if destruction be our lot we must ourselves be its
author and finisher.


Or,
we have met the enemy and he is us,

Pogo Possum.


World Reserve Currency

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