Word: dollarization
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...quick replacement of the dollar as the world's No. 1 currency doesn't seem likely either. Statistics from the IMF show that the percentage of global currency reserves held in dollars has been declining in recent years - but only marginally. Dollars accounted for 64% of the world's currency reserves at the end of 2008, down from 67% three years earlier. There remains great incentive for countries with large dollar reserves, like China and Japan, to continue to invest in dollar assets to preserve the value of their holdings. Besides, replacing the dollar would demand a level of cooperation...
...dollar has also been supported recently by the deleveraging taking place within the U.S. financial system. Desperate for cash, U.S. financial institutions have been liquidating foreign assets and repatriating the funds, pushing up the value of the dollar. As that process plays out, a key support of the dollar's value could be removed. Currency markets are clearly jittery. In late March, U.S. Treasury Secretary Timothy Geithner sent the dollar tumbling when he said he was "actually quite open" to China's proposal for a greater role for SDRs. The dollar lost 1.3% against the euro within 10 minutes...
...Despite all the nervousness, the dollar is not necessarily destined to decline. Large budget deficits don't automatically lead to weaker currencies. In the early 1980s, the dollar strengthened even as the Reagan Administration embarked on a spending spree, because higher interest rates attracted foreign money, pushing the dollar up. The budget deficit "is not at the center of thinking about the dollar," says Richard Portes, an economist at the London Business School...
...greenback has also shown surprising resilience amid the financial meltdown, since investors continue to see it as a safe haven in bad times. Even after some recent losses, the dollar is 15% stronger against the euro than it was in mid-2008. The dollar has maintained its popularity in part because most major currencies don't look much more attractive. Investors judge the value of a currency relative to others. Though the U.S. economy may be in its worst condition in almost 30 years, the rest of the industrialized world isn't any better off. "The dollar should be much...
...Whatever world leaders decide, some economists believe that the dollar cannot avoid some deterioration. As other nations and regions gain in wealth and economic influence, the U.S. economy will slowly lose its preeminence and the dollar its stature as the undisputed world currency. Harvard's Frankel foresees that the supremacy of the dollar will erode over the next 15 years or so, with other currencies, like the euro, making inroads and forming a system in which multiple currencies share the world stage. "This is the last major crisis in which the dollar is viewed as a safe haven," Frankel predicts...