Friday, March 4, 2011

WSJ Article on Possible End to Dollar's Reign as Worlds Reserve Currency

link here to article

(link from Manan Shukla)

Changes in the status of the Euro and the Chinese Yuan are occurring which will provide competition for the Dollar which accounts for the majority of foreign currency trades and trades in commodities around the world. The Euro will be perceived as a safe alternative to the Dollar for investors seeking a safe haven. Chinese banks are doing international transactions in the Yuan and China plans to establish Shanghai as world banking center by 2020. The implication is that there will be competition for the first time since WW II to the Dollar as the sole reserve currency of choice.

If the Dollar shares its status as the worlds reserve currency of choice with the Euro and the Yuan there are consequences. It will be more expensive for the US to fund its debt by selling treasuries since there will be safe alternatives for sovereign banks. We will have to export more to rebalance our current account deficit. The Dollar will fall in value by about 20% in order make US exports cheaper and foreign imports to the US more expensive. Higher import prices will affect the US standard of living by around 1.5% of GDP which is approximately $225 billion in 2010 Dollars, or around one half of a year's growth in the economy.

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