Home » Currency War » Welcome to the Currency War, Part 5: The Dollar Gets Serious Competition

Welcome to the Currency War, Part 5: The Dollar Gets Serious Competition

by John Rubino on November 26, 2012 · 25 comments

Not so long ago the dollar was the world’s only reserve currency. Everything else was one (or several) steps down in terms of safety and liquidity, and major financial institutions acted accordingly, accumulating dollars for the risk-free parts of their portfolios. Global demand for dollars was, as a result, effectively infinite, which meant the US could borrow whatever it wanted, secure in the knowledge that the Treasury bonds it created would find willing buyers.

But quietly, over the past couple of decades, the dollar has been joined at the top by the euro, yen, pound sterling and Swiss franc. And now the list of legitimate reserve currencies has expanded to include Canadian and Australian dollars:

Aussie, Canada dollars termed reserve currencies

LONDON (MarketWatch) — The Australian and Canadian dollars, the world’s leading commodity-rich currencies, are being formally classified as official reserve assets by the International Monetary Fund, marking the onset of a multi-currency reserve system and a new era in world money.

In a seemingly innocuous yet highly portentous move, the IMF is asking member countries from next year to include the Australian and Canadian dollars in statistics supplied by reserve-holding nations on the make-up of their central banks’ foreign exchange reserves. The technical-sounding measure, reflecting growing diversification of the world’s $10.5 trillion of reserves, is likely over time to exert wide-ranging impact on world bond and equity markets.

Expanding by two the list of officially recognized reserve assets from the present five — the dollar, euro, sterling, yen and Swiss franc — signals a new phase in the development of reserve money. For most of the past 150 years, the world has had just two reserve currencies, with sterling in the lead until the First World War, and the dollar taking over as the prime asset during the past 100 years.

Sterling — although still the world’s third reserve currency on IMF figures, just ahead of the yen — has been in relative decline since the Second World War. The birth of the euro in 1999 has turned the European single currency into the world’s No. 2 reserve unit, but it is now officially accepted that the dollar and the euro share their role with smaller currencies.

Enshrining in official thinking a development already evident among reserve managers and on private markets, in a sense, does no more than catch up with reality. However, the IMF step has both practical and symbolic importance and will likely promote further asset diversification among official and private asset managers.

The popularity among central banks of the Australian and Canadian dollars, which have been relatively strong even against the firm U.S. dollar during the past few years, reflect their stable economic growth and intact banking systems since the financial crisis, as well as the influence of Australian and Canadian commodity resources. On informal estimates, worldwide official foreign-exchange holdings in each of the two currencies probably are around $60 billion.

The Chinese renminbi, the Korean won and the Singapore dollar are being held by a relatively small number of central banks. There are no Asian currencies (apart from the yen) on the new IMF list, reflecting their still very low use as official assets.

The renminbi has attracted widespread attention as a possible future reverse currency. But it’s still some years away from attaining that status, primarily because it is not fully convertible. Although held in appreciable quantities by 10 to 15 central banks around the world, the Chinese money lags as a reserve currency behind not just the Australian and Canadian units but also some Scandinavian currencies.

People’s Bank of China Gov. Zhou Xiaochuan said at the weekend: “For the central bank, the next movement related to the yuan [renminbi] is going to be reform of convertibility … We are going to realize it, we are moving in this direction, we need to go further, we will have some deregulation.”

Zhou, who will have completed 10 years at the central bank next month, is widely expected to retire shortly. The focus will be on how much scope the Chinese Communist leadership gives his successor to pursue further financial liberalization.

The importance of the dollar has diminished, from a peak of 71.5% of declared reserves in 2001 to just under 62% by 2012. Outside the five standard reserve currencies, the importance of “other” currencies has risen, from a low of 1.3% in 2001 to 5.3% by end-June 2012, amounting to $310 billion.

 

Some thoughts
Categorizing Canadian and Australian dollars as reserve currencies makes sense when you view those countries in terms of gold, oil, sunshine and other resources per citizen. By that measure, each Canadian and Australian dollar is backed by a lot more real value than are the currencies of the paper-dependent societies like the US, Europe and Japan. If, as seems likely, we’re in the early stages of a shift away from financial assets and towards real things, the relative strength, and currency exchange rates, of the better-run resource-based economies will keep improving, making their currencies less risky and more profitable investments.

Note that the Chinese renminbi (aka the yuan) and Singapore dollar aren’t on the list. But they will be soon, with China now the second biggest economy (and an aggressive importer of gold) and Singapore becoming the preferred destination of global savings (especially gold storage) now that Switzerland has been cracked by the IRS and other tax authorities. See China’s next step in yuan overhaul is convertibility.

Gold, meanwhile, is once again being accumulated rather than dumped by central banks, and has already, arguably, replaced the dollar as the most coveted reserve asset. This, by the way, is simply a return after a 40-year absence to the place gold has occupied since the beginning of recorded history.

What does this mean for the dollar? First, a lot of central banks and trading firms will sell dollars to buy those other currencies and gold in order to make their portfolios reflect evolving financial realities. That selling pressure will, other things being equal, lower the dollar’s relative value, which is another way of saying that the US might not be able to borrow infinite amounts of money going forward, forcing us to either cut annual deficits far faster than is currently planned or pay a higher interest rate on future borrowings, which would increase future deficits.

The US, in short, will finally be subject to the same economic laws as lesser countries, with the same result: excessive debt and money printing lead to currency crisis which leads to depression.

 

  • informationagefinancejason

    Agree completely. I read the Collapse of the Dollar 6 or 7 years ago and it completely changed my investment approach. It really opened my eyes and put me on a new path. The thing that always amazes me is how most of the people I talk to personally just “glaze over” when discussing levels of risk and the fragility of the global financial system. Again, John nails it with his commentary. I expect to see the gold backed Renminbi in the next year or 2

    • acjitsu

      @df93eff22fecc81b9b909e4461cd45cc:disqus : I completely agree with you. I can’t tell you how many people I’ve tried to warn/inform at work or members of my family. They look at me like I have ten heads. Sometimes I get the chuckle and walk away. I had to research this thesis approximately 4.5 years ago. The more I read, the more I believed guys like Rubino were telling the truth, and it has been unfolding just like they have been describing, albeit, slowly. The best part about this whole process is that I finally learned about economics and I’m eternally grateful for the education.

  • Pingback: Gold and Silver • The Dollar Gets Serious Competition « lessbull.com()

  • Pingback: Monday Morning Links | Iacono Research()

  • Selaretus

    The rest of the civilized world are not idiots. They watch the Fed printing unlimited and increasingly worthless toilet paper dollars whenver the economy needs a boost to stimulate ‘growth’. How COULD the dollare remain the world’s fiat currency with this reckless process underway???

  • saints

    Maybe this is how-

    The dollar is not an “unbacked” currency. Its backed by OPEC oil and the US Navy. Its collateral backing is that Opec only takes US dollars for its oil. That is backing, pure and simple. Backing in effect: Whenever necessary opec is there to raise or lower production, keeping the price of oil in line with world economies. if the dollar price of oil gets too hot (too few dollars), they increase production bringing the dollar value back in line with oil and world markets. If the dollar price of oil falls too low (too many dollars) they just reduce production to bring it back into line.
    The Navy guarantees safe tanker shipments around the world and protection for them back home. Thats why the dollars demise has been greatly exaggerated.

    Also, with currencies- Global corps do so much international business around the world as an example-you dont think mercedes or BMW are going to let the price of their cars fluxuate too much in dollars or euros do you?. They always stay steady and within predictable ranges. This is the main thing that central backs regulate. smooth prices around the world for global corps.

    • Bruce C.

      Good points. And also remember (?) that the “petro-dollar” agreement was for the US to protect the OPEC nations (Saudi Arabia in particular) from Israel. Obama is a muslim and everyone who isn’t in denial knows this, so that also contributes to the dollar’s strength because “everyone” knows that Obama/US will seek/act to repress Israel, even if in retaliation (consider the latest “Gaza” sideshow). I’ll believe the Dollar’s demise when I see it, which is pretty much what the pragmatic financial world thinks too. Let’s see how Treasuries do during the “fiscal cliff” debates. I say they’ll go up no matter what and interest rates drop even more as suicidal capitulation sets in.

      • werpor

        The dollar has been ‘demising’ for a long time. A dollar is a piece of paper. It has no value whatsoever. A piece of paper such as a dollar, is a representation. And it represents less and less purchasing power every day. One of the most important purchases is labor. Oddly, the more paper dollars there are, the lower wage rates become. Why? Because no one wants those paper notes. As soon as those paper notes are circulated they are transacted, rather than held, and they are converted into something of greater value — ideally gold — which removes the value of the dollar from circulation.
        If a producer discovers that no one wants his products at the price he must get to earn the cost of capital, pay taxes, pay for raw materials and pay for labor; the only input that the producer can control — other than declare bankruptcy — is labor. Labor rates decline — except government labor rates — and of course, then, purchasing power declines.
        For many years those paper dollars have been spent, but they have not recirculated in the US economy. They have been spent on things produced elsewhere; collecting in windrows in Japan, China, the Middle East, etc., or they flow ‘upwards’ purchasing goods from companies — concentrated and mature — who have no pressing need to invest in increasing output in the USA. Those idle dollars are ‘frozen’ which is to say non existent in the ordinary economic sense.
        They have though a distorting effect. They flow around the world seeking a return and so heat up economies which do not benefit by their existence in their markets.
        Oddly, they exist, but they do not have value. China has so many dollars they do not know what to do with them. These hot dollars are printed in the US but they do not stay in the US.
        Yet they are in short supply in the US. Why else would wage rates be plummeting and why else would so many people be dependent on government transfer payments? Why else would interest rates be so low? Why else would consumer debt be so high?
        These consequences are a manifestation of the dollars demise?

        • Bruce C.

          Also some good points. My “defense” of the dollar is actually largely cynical in that there are so many complex and interconnected issues involved in the subject that no one statement or concept is wholly applicable. As far as discussions like this are concerned, it’s all about timing. I assume that few would argue that the dollar is here to stay for the long run but the implied question is when will it really start to falter. It’s the least ugly contestant in a beauty contest, but a contestant with lots of “connections”, if you will, with a lot of utterly pragmatic and desperate participants. It’s easy to dump on the dollar and the sorry American system that has arisen but even the most craven can sense that living in a world without the echo and potential of the wisdom embodied in the US Constitution is horrifying. US Treasury bonds, for example, are still (largely) considered “risk free” because of an almost other-worldly legal and moral integrity that frankly most of the world doesn’t deserve and are incapable of philosophically as we will all – I fear – unfortunately come to experience. I realize that I’m making these claims in the face of unprecedented levels of corruption, etc., but that corruption is so outrageous because it was fostered under the guise of worthiness. It’s a sad, sad, sad situation. To believe that fiat currencies – the US dollar in particular – will endure is to believe in the integrity of politicians, and that is practically an oxymoron.

          Furthermore, the drop in wages both real and nominal is quite simply because the global economy has increased the scope of the labor market so those willing to do the most for the least has expanded to include those who will do just about anything just to survive. Ironically, being at “the top” has also become a lot dicier.

          • saints

            “I assume that few would argue that the dollar is here to stay for the long run but the implied question is when will it really start to falter.”

            I guess to start trying to answer that question is to first acknowledge just how big the international economy is and how many people and corps. use those $100 bills on a daily basis to do business. Picture how big that is. Then ask what in the world could possibly replace them. I say that the dollar has “intrinsic” value because it is the king of “utility” value. Its utility value comes from OPEC because oil makes the world go round. Everything else follows from that. When someone else comes along with a currency that tops that, it’ll be when OPEC switches to it, and somebody else tops the US Navy. It aint gonna happen in our lifetime, I’m fairly certain of that.

          • John Trainor

            God has richly blessed our nation, but we have become prideful and think, “I sit a queen and shall see no sorrow” – read Revelation 18 to see where things are truly headed. Also, look online to read the last eight chapters of the book, “The Great Controversy.” The United States is now in the process that will end in national apostasy from the principles upon which our republic was founded, and national apostasy will be followed by national ruin.

      • R Davis

        I am not sure that “Obama is a Muslim” is where THE PROBLEM IS AT.
        Muslims are not running Wall St. & it is Wall St that has killed America.
        If only the government listened a little less to THE BANKS.
        On the other hand if The Middle East – GAVE THEIR OIL TO AMERICA FOR FREE – would this make everyone fell better about Muslims ?

        Imperialism –

        The West is used to taking what they want, like a spoiled child. If they don’t give , we bomb.
        Recently, former Australian P.M. Kevin Rudd said on TV news Australia, to the effect that we should go to war with China, due to China not wanting to capitulate to American/Australian plans for their co-operation regarding China’s monies.
        ” if they don’t let us in to mess with their economy = $$$” type stuff.
        They are prepared to commit our Defense boys & girls to risk their lives – ” sick thinking”

    • saints

      Bruce C. – “I assume that few would argue that the dollar is here to stay for the long run but the implied question is when will it really start to falter.”

      I guess to start trying to answer that question is to first acknowledge just how big the international economy is and how many people and corps. use those $100 bills on a daily basis to do business. Picture how big that is. Then ask what in the world could possibly replace them. I say that the dollar has “intrinsic” value because it is the king of “utility” value. Its utility value comes from OPEC because oil makes the world go round. Everything else follows from that. When someone else comes along with a currency that tops that, it’ll be when OPEC switches to it, and somebody else tops the US Navy. It aint gonna happen in our lifetime, I’m fairly certain of that.

      • R Davis

        They say that the oil in the Middle East has all but dried up ?
        I wonder what the Arabs will do for money ?
        ECO-FRIENDLY is the name of the game today – Cars running on compressed natural gas – can go from 0 – 200 kph in seconds.
        google – MAGNA STEYR Mila. the cars of the future
        Solar Panels on our roves feeding back into the grid, so they can sell it on to power traffic lights, roadways, cities, you name it – we are the power plant.
        Yesterday has gone, tomorrow has arrived.
        I am Australian.
        Our nations have not invested in the future, drunk with the guzzling of yesterdays wealth.
        The Clowns were in charge & they lived it up & left only crumbs.

      • R Davis

        US Defense Forces embrace the future.
        Nevada Air Force have –
        SOLAR PANELS
        supplying 25% of their power needs.
        thereby saving $1.000.000 per year on their power bills.
        SANITY & INSIGHT PREVAILS MAN !
        Of course the conservative political arena are scathing as to a waste of monies spent on what they call “experimental technology”
        Solar has been around for 50 years at least. Talk about be being uninformed.
        MOST LIKELY IT IS THAT THE GREEDY RED NECKS ARE LOATHED TO SPEND A DIME ON THE DEFENSE FORCES, REGARDLESS.
        We have the same problem here –
        I believe that the political arena is afraid of them.
        The only reason to be afraid is because they are shafting the nation & the defense forces have the power to take them down – boy.
        Reg., Nevada Air force, way to go !

  • Pingback: WTC ‘dustification’ and Tesla – 1.23Mt, a lot of mass is missing / Syria – warfare by deception « paulthepaperbear()

  • Pingback: Poster's Paradise » IMF declaring Aussie and Canadians part of new reserve()

  • GoldenPhi

    Maybe This is how – response – this is the Old way – you are correct that it has been kept afloat by being a Petro dollar since the 70’s. However this is changing. Will not be so for very much longer and places like China and Russia are already trading in other currencies for their petro.
    While the US has been able to go and stop places like Iraq who initiated this, Iran is doing so with China (coincidentally they are also now the next in line of fire)

    Its not going to be so easy to do the same to China or Russia as Iraq… Iran may prove to be more than they can chew too.. Africa has also recently jumped on the no-US petro dollar.

    Bottom line – US Petro dollar is destined to be no longer.
    When this clear (its not yet), we’ll see an impact. As been noted, what else does it have going for it? Fancy toilet paper?

  • Bob

    The West, it’s Media and it’s ‘Economists’ have been extremely successful convincing much of their welfare-teat sucking minions that it is right to consider Gold and Silver a relic of the past.

    Not so in Asia. Chinese and Indian culture positively encourages its citizens to hold the fruits of their enterprise in Gold and Silver. They know what the true reserve currency of commerce is, and it ain’t the ‘Petro-collar’.

    The US could pay for Oil with bags of dog shit, if it so pleased them. Their Military can ensure that, for now. But it won’t last. Empires, and their fiat currencies never do. Ever.

    I pity the Iranians. They’re the last bastion of resistance to this current ‘Romanesque’ death expansion by the Anglo-American-Israeli global Oil cartel.

    The US is failing. As did the home state of every Empire the world has seen. This last smash and grab for the worlds most used commodity (Apart from water) is the only thing keeping it afloat.

    To state that the US Dollar will never collapse is pure folly.

  • The YenGuy

    The age of prosperity is transitioning to the age of fiat asset deflation where wealth can only be preserved by investing in physical gold.
    Despite last week’s rally, fiat assets of Stocks, VT, Bonds, BND, Commodities, DBC, and the Major World Currencies such as the Japanese Yen, FXY, the Euro, FXE,the Canadian Dollar, FXC,the British Pound Sterling, FXB,The Swedish Krona, FXS, the South African Rand, SZR, the Swiss Franc,FXF, the Brazilian Real, BZF, the Indian Rupe, ICN, and the Australian Dollar, FXA, as well as Emerging Market Currencies, CEW, have failed to grow and maintain investment value since September 14, 2012, as the world central banks’ monetary authority is exhausting and carry trade investing cannot work when currencies are sinking.
    The inability of stocks to leverage higher is seen in the combined chart of closed end equities, CSQ, trading lower on closed end credit, PFL, specifically peaking and turning lower since September 14, 2012. The failure of neoliberal finance is seen Aggregate Credit, AGG, turning lower, as Mortgage Backed Bonds, MBB, Junk Bonds, JNK, Leveraged Buyouts, PSP, Senior Bank Loans, BKLN, International Treasury Bonds, BWX, and Emerging Market Bonds, are falling lower in value as is seen in the combined chart. Distressed investments, such as those in Fidelity Investments FAGIX, which are the backbone of the US Federal Reserve’s balance sheet, are turning lower in value. The Fed’s QE1, was based upon a trade-out of money good US Treasuries, EDV, TLT, for distressed investments held in the Too Big To Fail Banks, RWW, and the Regional Banks, KRE. It was the TARP facility, that gave seigniorage, that is moneyness, to World Banks, IXG, and it was the acquisition of Maiden Lane investments that gave seigniorage to JP Morgan, JPM, and other Investment Bankers, yet both of these turned lower today, the first trading day of this week.
    Wealth can only be preserved by investing in and taking possession of gold, GLD, either in physical form or in Internet Trading Vaults such as GoldIsMoney or BullionVault. Jack Chan of JC’s Buy and Sell Signals, … http://stockcharts.com/public/1094070 … gave his buy signal on gold on Friday November 23, 2012
    The investment demand for gold is now accelerating ss fiat assets of all types fall into the pit of financial abandon.

  • Pingback: Dollar collapse possible as other currencies compete for world reserve status | Economic Collapse News()

  • Rachael

    This is just one more move in a much larger scheme of creating an IMF ‘managed’ basket to ‘help’ get everyone on board with a single global fiat standard controlled by the supranational IMF.

    When Obama approved the Fourth Article of the IMF in his first summer in office, the stage was set……..

  • Pingback: Currency Wars, Trading $ Driver, Forecasts 2013 | Machholz's Blog()

  • Wayne Young

    Could someone please explain the ramifications of this competition to the dollar on the everyday American investor? How might/should this turn of events affect how I might invest my money?

  • R Davis

    The system is falling apart & “they” are doing all they can to hold it together.

    Alan Greenspan in September 4, 1998 speech at University of California Berkley, informed his audience that the traditional American way, THE NOW DISCREDITED CAPITALISM is being torn down & rebuilt – he called it “Creative Destruction”
    What was he talking about ?
    The willful & wanton destruction of a nation. = TREASON in my mind. ?
    I have a feeling that the right hand has no idea what the left hand is doing.
    The loonies are running the show.


[Most Recent Quotes from www.kitco.com] [Most Recent USD from www.kitco.com] [Most Recent Quotes from www.kitco.com]