Francesco Guerrera is The Wall Street Journal’s Money & Investing editor and he wrote an article a couple of days ago asking if the US reign as King Dollar was going to be sustained.
Here is a quick clip from the WSJ live site
The phrase the “healthiest horse in the glue factory” could equally be ascribed to the Australian dollar at the moment and indeed as I discussed in my Webinar on FXStreet.com I think it is precisely this reason – what I call the FX least ugly contest – that the AUD is doing so well when the usual drivers suggest it should be much lower.
The dollar’s role as a safe haven has bolstered its value in a period in which the U.S. has been plagued by sluggish growth, fiscal inaction and a debt downgrade. In fact, the greenback has risen nearly 8% against a basket of seven major currencies measured by the WSJ Dollar Index in the 15 months since Standard & Poor’s stripped the U.S. of its AAA rating.
And he goes on to say that Reserve currencies are fragile creatures.
We know that to be true. As Barry Eichengreen showed in his fabulous book “Exorbitant Privilege” on the rise and fall (possibly) of the US dollar as a reserve currency. It took just 10 years for the dollar to displace the pound after the start of World War 1 and of course the reverse is also true as China rises from Economic also ran to the second biggest economy on the planet and eventually the biggest.
But China has no appetite to take on reserve status, let alone a free float that requires, as it would put undue upward pressure on the Renmimbi and choke off growth which is still too heavily slanted toward exports. The Job of the incoming Chinese leadership which takes the reins tomorrow is to transition China to an economy that has more self sustaining domestic lead growth. It is no small task but one that they must seek to achieve - Then China might really be ready for Currency reserve status.
As Nathan Sheets, a former top Fed official and Citibank’s current Head of international economics says in Guerrera’s story,
“I will start worrying about the dollar’s status as a reserve currency when we open up trade with Mars, only an extraterrestrial currency can challenge the dollar.”
In the meantime with the Europe and the Euro in the mire, the Yen trapped by its own economic misery and no other alternatives the US dollar remains the “Reserve Currency Du Jour”. Likewise the Australian dollar has become a reserve currency by proxy as global central banks, sovereign funds and fixed income managers park their cash in Australia and the Aussie until the global economy recovers and other alternatives appear. This could take five years or more so expect the Aussie to be stronger for longer.
Have a great day.
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