There is often talk about the USD being challenged as the ‘King of currencies’. See here for some of the reasons for the USD’s status previously outlined. However, a helpful post come out this week from Bloomberg explaining why the Yuan, gold, Bitcoin, & the Euro are very unlikely to challenge the USD’s status anytime soon.
The USD is the number one reserve currency in the world
According to IMF data, around 60% of all central bank foreign exchange reserves are in US dollars.
On top of this, around 9 in every 10 foreign currency transactions each day involve the USD, according to the Bank for International Settlements data. So all of this means that the USD is front and centre of the currency world. Day to day, it is a dollar centric financial world.
Lack of alternatives?
So, what could replace the USD in theory? The main contenders are the yen, yuan, euro, gold, and there is talk about cryptocurrencies in the mix too. The problem with the euro is that the union is not as secure as the US. The breakup of Europe has been brought into stark focus since the near-collapse of the euro. Gold can’t move quickly enough in our digital age. Crytpo’s are too new and too volatile to be seen as a responsible reserve replacement. The yen could be a contender, but why choose the Yen over the USD? Just to prefer anything but the USD. It does not make sense when so many translations are simplest in the USD. The Yuan is lacking the infrastructure of the USD. Bloomberg quote Anders Faergemann of PineBridge Investments who says, ‘China has the economic power to match the old hegemonic power of the U.S., however, it has yet to build the infrastructure to become a financial powerhouse’.
So, the talk of the USD being replaced as the world’s reserve currency is still just a talk. The reality is that the USD will remain as the world’s most popular reserve currency for the foreseeable future.