After the Dollar, Which Reserve Currency Is To Rule the Global Monetary System?

After the beginning of the financial meltdown and global financial crisis, every government and central bank tried, through any means, to find an appropriate solution. The first step was the implementation of emergency measures aimed at saving the banks and insurance companies. The second step was the launch of an expansive monetary policy. The third step consisted of creating a quality program of economic rebound, all of which was funded based on debt.

Since all of the aforementioned did not suffice, a fourth step was implemented: an ultra-expansive monetary policy never seen before, with quantitative easing and infinite resort to public debt. After all of this was without real success for any country, a fifth step was brought to the fore, that is, the use of sanctions and protectionist measures. Inexorably, a sixth step ensued: a devaluation tumble down.

In the currency market, devaluation is already well on its way. The European Central Bank and Bank of Japan are currently weakening their respective currencies — the euro and the yen. The Chinese Central Bank wants to avoid a re-evaluation of the yuan. The Russian ruble is under a lot of pressure due to Ukraine. The raw materials currencies — i.e. Canadian/Australian/New Zealand dollar — ultimately suffer from weak markets. The Swiss National Bank is trying every trick to prevent currency appreciation after it decided to revoke the fixed franc-euro convertibility. The Bank of England is far from happy about the escalating value of the pound sterling. Everywhere, nearly all speculators are already long* in U.S. dollars. The U.S.A. does not want a re-evaluation of the U.S. dollar for fear of aggravating its foreign trade deficit even more. The global economy and global monetary system are currently mutating.

The EU 28’s GDP in purchasing power standard, PPS 1, represented 18.6 percent of world GDP in 2011. The U.S., the world’s second largest economic power, represented 17.1 percent and China, in third, represented 14.9 percent (source: EuroStat). Global Bank and the U.N. are convinced that, according to this statistical model, China would now be first and India would be ahead of Japan.

Countries’ portions in global GDP are not proportional to their part in global foreign exchange reserves, amounting now to around $11.77 billion. The IMF’s Currency Composition of Foreign Exchange Reserves is able to allocate 52.2 percent of this amount — where 62.3 percent are issued in U.S. dollars and 26.6 percent in euros. If we had the Japanese yen (4 percent), British pound (3.8 percent), Canadian dollar (1.9 percent) and Australian dollar (1.9 percent), then these six currencies would represent 97 percent of global reserves.

Which Currency Would Substitute for the Dollar?

The potential candidates eligible for entering the reserve currency circle are the yuan, rupee, real and ruble — but none meets the condition of free convertibility at the moment.

The biggest portion of reserve currency in the world remains issued in U.S. dollars. In fact, the nominal amount of USD stayed at the same level in the last quarter, but has decreased as a percentage. The euro will not become the global reserve currency; for this matter, we will see a corpus of currencies emerge.

The Society for Worldwide Financial Telecommunication published a currency list comparing their use in trans-border payments. On the top of the list was the U.S. dollar (44.6 percent) and the euro (28.3 percent), then the British pound (7.9 percent), yen (2.67 percent), Canadian dollar (1.8 percent) and Australian dollar (2 percent).

In this ranking, the yuan is fifth —13th two years ago. It represents only 2.17 percent of the total amount of payments, but displays a strong momentum. In 2017, the yuan could be freely convertible. Currently, the yuan-dollar daily variation is limited to a tight window. As estimation goes, its market participation should reach 25 percent by 2020. With a wider international reach, the yuan could be considered a reserve currency by the IMF. These reserve currencies are the basic factor for the right to issue a special type of currency managed by the IMF, called SDR [Editor’s note: Special Drawing Rights, a special reserve asset that functions as a currency], which will be readjusted this year as it is done every five years.

The importance of countries in the global economy is therefore different in terms of the importance of their respective currency in the reserve currency system and also different from the importance these currencies have in international payments. Of course, the different percentage cannot be exactly the same, but the gap has become so large that tensions and frictions have brought to the fore protectionist tendencies and has slowed down the dynamic of economic growth. The hegemony of the dollar is bound to diminish in coming years.

Gold Has Not Said its Last Word …

Central banks keep a part of their monetary reserve in gold. China and Russia have considerably increased the gold stock in their currency reserve in the last quarters. Sellers have essentially been comprised of Western funds. Officially, China has 1,054 tons and Russia 1,208 tons in their monetary reserve, 1 percent and 1.2 percent respectively. The U.S. has 8,133 tons (71.6 percent), Germany 3,384 (67 percent). France and Italy have 2,450 tons (66 percent).

Currently, central banks in the Eurozone have supplied 10,792 tons of gold as “security reserves.” All the central banks bought 477 tons in 2014 (the biggest volume in the last 50 years) and are ready, according to the World Gold Council, to buy at least 400 tons in 2015. The question has been raised: Are central banks already preparing for a changing role for gold in the global monetary system?

Conclusion: A solution to the international unbalance must be found. If politicians cannot find one, the markets will impose one. A reform to the global monetary system will not be found immediately but in the next 10 years; for now, a basket of currencies with gold could take over the current system. Financial investors must get ready. The U.S. dollar is far from being the “only alternative currency” and gold is not necessarily to be “avoided,” contrary to what the mainstream media is repeating ad nauseam. …

*Translator’s Note: Long, i.e., betting that the U.S. dollar will go up in value.