So, What Would You Rather Hold?
I was at a business dinner the other night, sitting with a banker, an accountant and an exporter (sounds like the start of a joke, doesn’t it?). We got to talking about exchange rates and the decline of the dollar in recent months. Then the others asked me if the U.S. dollar would remain a reserve currency for much longer.
The conventional wisdom seems to be that a cabal of countries (China is always named) will combine to take the U.S. dollar off its perch as top reserve currency. I disagree. The United States has so much that the rest of the world wants to buy that there will be strong demand for the dollar for many years to come. And, even though America still has a lot of recovering to do, recovery will happen and the country will remain attractive to foreign investment. I think it is far more likely that the dollar will remain a reserve currency, but that it won’t be the ONLY such currency. A lot of what we see today is the result of other countries becoming economically stronger, while America remains a strong, viable economy. A natural result will be for countries to hold a diverse mix of currencies in rough proportion to the markets with which they trade. The dollar will be a strong part of that, and probably the largest part.
Ambrose Evans-Pritchard, international business editor of the London Telegraph, has a blog post up in which he parallels my thinking, but goes further. The title of his post says it all: “Dollar Hegemony For Another Century“. He makes a cogent argument that the dollar will share its reserve currency status with the Chinese yuan until about 2030 – and then will come back strongly as the world’s leading reserve. He has some interesting arguments involving demographics in China and Japan, a looming financial crisis in Japan, and American productivity. His conclusion is that the U.S. dollar may be stronger at the end of the century than at the beginning.
