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Could a Foreign Currency Replace the US
dollar as the World Reserve?
The American dollar could
be replaced as the World
Reserve currency by a combined
currency from Brazil,
Russia, India or China, collectively
as the BRICs. These countries
have large economies and are outgrowing
their emerging-market status. So
will they replace the American dollar,
and if so, when does this happen?
There are four currencies involved
in BRIC - the Chinese Yuan, the Brazilian
Real, the Russian Ruble and the
Indian Rupee. Though these countries
could possibly create a common currency,
similar to the Euro, this would be
difficult to accomplish. If you doubt this,
try to imagine how an authoritarian Russia
will work with a doctrinarian Communist
China, a Democratic India, and
an unstructured Brazil. The combination
would be hard to see emerging with any
clear Asian-European-Latin American
consensus. Even if the dollar were not replaced
by a BRIC currency, it could still
be swapped out for another currency.
The current advantage to having the
American dollar as the world reserve is
that we have the luxury of borrowing in
our own currency. We can always print
more money, while other countries do
not have the option of influencing the
money supply. But, by having the world
reserve’s currency, our monetary policy
is also compromised by other countries
trying to pull the dollar toward their
own currencies.
Overall, BRICs lack the economic
fitness to handle the responsibility of the
world reserve; however, if BRICs start
to talk about replacing the dollar, there
could be a major re-pricing of commodities
as investors lose confidence. The
buzz and fear around a possible BRIC
replacement for the dollar has more to
do with a political and economic power
struggle than with getting a stronger
currency as the world reserve. The
BRICs have to threaten the possibility
if they want to be taken more seriously
and seen as real economic powerhouses
on the world’s economic stage.
The BRIC countries will likely pursue
the replacement of the dollar as the
reserve currency. However, this is not
the same as saying they will achieve it.
The likelihood is that they will not. This
is largely because of economic and political
limits to the BRIC countries.
The challenge for BRIC is to reproduce
the once solid stability of the
American dollar and not to emulate the
relatively tarnished Euro. More challenging
is how BRIC will replace the
dollar without debasing the significant
dollar reserves and dollar-denominated
investments of those countries, and
without harming the still delicate U.S.
economy, and without hammering the
many futures markets that are based
upon common U.S. pricing.
Of the four BRIC currencies, perhaps
China’s Yuan is a logical replacement
for the dollar at some point, since
China has been lending the US money.
China is better placed than the U.S. to
provide a reserve currency for the 21st
century because it has a large current account
surplus, focused government, and
few of the economic worries the U.S.
money
health
By Paul Keough, Ph.D., MBA
faces. While such a major change is
some way off, the Chinese government
is laying the ground for the Yuan’s positioning.
China will soon want to see the
Yuan included in the International Monetary
Fund’s special drawing rights basket,
as well as seeing the Yuan used as a
means of payment in bilateral trade.
China’s currency is a long way
from overtaking the dollar as the world
currency, and even if that occurred,
there likely would be some intermediate
steps. At the present time, China
manages its currency too closely to be
a world currency. The good thing about
China’s currency right now is that its
management techniques keep the currency
undervalued and its purchasing
power much higher than other countries
that are more freely traded. With
China’s Yuan pegged to the dollar, an
emerging conflicted country’s currency
is unlikely to replace America’s monetary
unit anytime soon.
In conclusion, a possible BRICs
takeover of the world reserve is unlikely
to happen soon, if at all, with China’s
Yuan as the most likely single currency
to eventually become the next world
reserve. At the end of the day, whether
or not people agree with U.S. economic
policy, the dollar is still currently the
best selection for the world reserve on
a relative basis.
Paul Keough, PhD, MBA is the
President at Turnkeough Corporation
(www.turnkeough.com). You can reach
him at paul.keough@turnkeough.com.
• Online: dotmed.com/dm10005
DOTmedbusiness news I s e p t e m b e r 2009 35