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The US Dollar is the World’s Reserve Currency, For Now

by on March 30, 2014 3:33 pm GMT
 

The US dollar has been the world’s reserve currency and safe-haven asset, but central banks could reduce their dollar reserves by 10 to 15 percent over the next couple years, according to the Bank of International Settlements (BIS). The BIS states that the double-digit reduction will not threaten the dollar’s reserve currency status, yet this could change.

Peter Zoellner, head of the banking department at the BIS, said that China’s yuan, or renminbi, would continue to grow. Zoellner told foreign exchange dealers that China’s role in trying to stop the ongoing appreciation of the yuan this year directed further interest to the tightly controlled onshore market. He said central bank reserves of yuan would grow “at a sustained pace” yet saw no signs of it overtaking the dollar as top currency.

At the ACI Financial Markets Association, Zollner said “it could happen that the percentage will go slightly down with the reserve currency from between 65 and 70 maybe to between 50 and 60 percent.” However, if central banks reduce their US dollar exposure to 50 percent – maybe lower – then that’s not really reserve currency status. “Most of the transactions over the last few years have been done in the offshore markets… but there is more and more activity in the domestic market in renminbi, quotas have been increased and so on,” continued Zoellner.

There have been multiple reserve currencies over the course of time, and they have all lost the coveted title. As economies continue to grow, and trade pacts in local currencies become more pronounced, the rule of the dollar as a reserve currency could be threatened.

The reserve currency status the dollar has basked in has allowed the US to borrow astronomical amounts at low cost, and if this status subsided or no longer the top dog in the neighborhood, it could get messy. The US have a total national debt over $17.5 trillion ($151,836 per taxpayer) and total liabilities exceed $61.3 trillion ($193,193 per citizen). Total interest paid on this debt is over $2.5 trillion dollars, and the US is currently spending 26 percent of available tax revenue to pay for this debt.

China has released comments about the dollar’s reserve currency status like “we don’t want to make any more foreign exchange reserve of any paper currency, because all the paper currencies are government debt currencies.” And if any currency is a debt currency, it is the US dollar. Faith, sooner or later, will be lost.

Historical Reserve Currencies

Historical Reserve Currencies