A Forex View From Afar

The Dollar’s Future As A Reserve Currency

A lot of talk has been heard lately regarding the dollar’s outlook as a major reserve currency, much of which has been initiated by Chinese and Russian officials, who tried to impose their global status at the international level in regard to the amount of U.S. debt held.

Despite this, the recent actions make the talk look like nothing other than empty words, as the two countries try to push more hot air into a balloon flying in a very cold environment. Despite all the recent accusations coming from Chinese officials, China still kept the same buying pace of U.S. debt, while Russia showed its support for the U.S. dollar during the G8 weekend, after it announced its plans to reduce its exposure towards U.S. denominated assets, something that caused a little shock in the financial market last week.

Ignoring the recent talks coming from China and Russia, TheLFB-Forex.com Trade Team argues that diversifying from the dollar can be really challenging for the vast majority of central banks. Right now, the only feasible alternative to the dollar as a reserve currency for now is the euro. However, what exactly a central bank would do with the euro, when the business relationships including trade balance and money transfers, are relatively low within the 16-nations, and the currency channel is illiquid most of the time.

A case in point would be Canada, of which a staggering 80% of its exports reach the U.S. economy, while only 4% of its exports and 6% of its imports are toward the Euro-area. The big question is, what could the BoC with its newly found euro reserves, when the liquidity in the euro-cad is very thin. Even the Chinese central bank would not have too many things to do with the euro, since the trade balance between the Euro-zone and China is rather small, and considerably less than 10% of the total Chinese balance.

One of the most important aspects is that, in order for a central bank to calculate a cross rate, it first has to triangulate the exchange rate to the dollar. Obviously, if the central bank is planning an intervention in the currency market (which by the way are done very often, especially for minor currencies) they would have to sell or buy dollars against the national currency, rather than euros, yuans or any other currency.

TheLFB-Forex.com Trade Team believes that the recent talks of the U.S. dollar losing its status as a reserve currency are greatly exaggerated. For now, the dollar’s status is safe, even though it is expected that the greenback will lose a few percentage points as central banks try to hedge its declines. However, this is far from the dollar losing its reserve status – as some say.

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