Could The US Dollar Be On The Way Out As A Reserve Currency?
A reserve currency is basically the strongest currency of the lot; it’s the one everyone has stocked up in case they need it. And by everyone, we mean the banks and governments and other similar organizations. History has it that reserve currencies are generally in place for quite some time, so these calls from China for things to change may well go unheeded for the foreseeable future.
But it is at least an intriguing story to look at. You can read just one of the many stories like this online by going to the Economist’s website.
So why is China so keen to see the US dollar displaced in this way? Apparently it would favor them very much if it was, but these things don’t happen overnight. Perhaps they are hoping that if they bring enough attention to the matter, it will become a reality and their own currency could possibly replace it?
Let’s have a look and see how the Chinese yuan has been doing against the US dollar in recent months, to see if this gives us any idea of the reasons behind their thoughts.
It’s actually quite interesting, because over the last eighteen months things have not gone downhill for the yuan. In fact, it started off 2008 on an exchange rate of 0.1369 against the US dollar. It then jumped into the 0.1370 region and stayed there for the next two weeks, finally claiming 0.1379 on the 14th. The very next day then saw a jump up to 0.1380, and thus began a prolonged period of good fortune for the Chinese currency. If you had been using your currency converter during this time, you would have found a steady increase of the exchange rates that went firmly in their favor.
The week ending the 25th January 2008 finished up on 0.1386, and just one week later that had improved still more to 0.1391. Three weeks after that and we were in new territory once more, as the Chinese yuan bagged 0.1400 US dollars for the first time. Perhaps this is why the country feels that the US dollar needs to step aside and let another currency take up the role instead? But surely they wouldn’t expect to take its place.
As February gave way to March things continued to improve during the first quarter of 2008. The last trading day in that month finished up with an exchange rate of 0.1426, so things were still clearly on the up. By the beginning of July things had improved still more, going up to 0.1459. Could this continue for the foreseeable future?
As it happened it was around that time that things seemed to level out somewhat. There were still ups and downs of course, but whereas the events of the last few months seemed to be more ups than downs for the Chinese yuan, there was now a more even picture to see. At the end of September 2008 the exchange rate stood at 0.1460; and on the last trading day of that year it had barely moved, sitting on 0.1465 as we waved goodbye to the year.
Things have meandered along, going up and down a bit here and a bit there, ever since. The most recent result – gained a couple of days before this report was written – sat at 0.1463. So you can see that the high points of 2008 have been retained, but not beaten.
Perhaps China feels as if these results – and the fact that it has held onto them – gives it good reason to suggest that a turning point has been reached for the US dollar as a reserve currency. Who knows, putting in motion such thoughts now could lead to such a change at some point down the line. Stranger things have happened, and all reserve currencies do eventually bow and leave another successor to take the reins.
But which currency would it be? Many favor the Euro and perhaps China feels that this would be a better choice. It certainly seems to be the only sensible choice, since the British pound is far from stable and reliable at the moment.
We are talking about some point in the future though, so let’s just speculate for now and remember that this is indeed just speculation.
