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The Beginning of the End for the US Dollar?
By admin June 17, 2014

US dollar vs China yuanOn June 8th, 2014 the Financial Times reported, “Russian companies prepare to pay for trade in renminbi”. Due to increasing political tensions between the US, EU and Russia over the situation in Ukraine, newly imposed sanctions “are pushing Russian companies to reduce their dependence on western financial markets.” Does this represent the beginning of the end for the US dollar’s reign as the world’s reserve currency?

Alan Blinder, an American economist and Professor of Economics at Princeton, stipulates that a reserve currency needs to satisfy four characteristics: an international currency accounting for a preponderant share of the official reserves of central banks, a currency used “hand-to-hand” in foreign countries, a currency in which a disproportionate share of international trade is denominated, and a dominate currency in international financial markets.

In 2011, the Bank of International Settlement provided an overview of currency distribution in Foreign Exchange Transactions and found that the US Dollar had the largest share comprising over 90% of the transactions. In 2013, it was determined that of the countries whose currencies were pegged, 19 were pegged to the Euro and 13 were pegged to the dollar.   The US dollar’s pervasiveness can also be contributed to a few factors that continue to reinforce its importance. The US has been running an accounts deficit since 1991 while the Fed, for the past 5 years, has been conducting unprecedented expansion of the money supply through Quantitative Easing (QE).

So what does the Russian move really say about the world’s reserve currency? With the inevitable unwinding of QE, the contraction of the Fed’s balance sheet along with higher capital requirements through policies such as Basel III, the dollar will not be as universal. In the short run, it is likely that countries will compete internationally through regional commercially integrated zones. These zones, which utilize local currencies, deliver many advantages and will likely provide opportunities to move away from the dollar. Overall, Russia comprises less then 3% of international trade and won’t usher in the collapse of the US dollar but the increasing influence of currencies like the euro and renminbi is hard to ignore.

 

For more information:

Auboin, Marc. “USE OF CURRENCIES IN INTERNATIO NAL TRADE: ANY CHANGES IN THE PICTURE?.” World Trade Organization . N.p., n.d. Web. 13 June 2014. <http://www.wto.org/english/res_e/reser_e/ersd201210_e.pdf>.

Cafariello, Joseph. “What if Russia Shuns the U.S. Dollar?.” What if Russia Shuns the U.S. Dollar?. N.p., 10 June 2014. Web. 14 June 2014. <http://www.wealthdaily.com/articles/what-if-russia-shuns-the-us-dollar/5200>.

Farchy, Jack . “Russian companies prepare to pay for trade in renminbi – FT.com.” Financial Times. N.p., 8 June 2014. Web. 14 June 2014. <http://www.ft.com/intl/cms/s/0/9f686816-ed51-11e3-abf3-00144feabdc0.html#axzz34eKAEUm0>.

“Investor’s List: Countries with Fixed Currency Exchange Rates | Investment FrontierInvestment Frontier.” Investor’s List: Countries with Fixed Currency Exchange Rates | Investment FrontierInvestment Frontier. N.p., n.d. Web. 14 June 2014. <http://www.investmentfrontier.com/2013/02/19/investors-list-countries-with-fixed-currency-exchange-rates/>.

 


Thanks for sharing !


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