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More Cracks Appear for U.S. Dollar as Reserve Currency

Currencies / US Dollar Dec 05, 2012 - 08:26 AM GMT

By: InvestmentContrarian

Currencies

Sasha Cekerevac writes: The U.S. dollar has been the world’s reserve currency for decades, but that position might be under attack. With the rising level of U.S. debt, many countries around the world are questioning the position of the U.S. dollar as the reserve currency.


Cracks are beginning to appear; the latest sign is that China and South Korea have come to an agreement in which banks from either country are able to borrow funds from a swap line that makes loans available to companies for deals in local currencies. (Source: “China, South Korea to Boost use of Local Currencies in Trade,” Bloomberg, December 4, 2012.)

This swap line is currently set at $59.0 billion, and allows firms to settle deals in either the Chinese yuan or the South Korea won instead of the U.S. dollar. On the surface, this might not seem like a direct attack on the U.S. dollar’s status as reserve currency, because reducing transaction costs is inherently advantageous to corporations. However, the willingness by these nations to increasingly avoid the U.S. dollar is a problem.

Shifts in the reserve currency status take many years to develop. We’ve seen rising U.S. debt levels for years, and this is putting increasing pressure on countries to diversify away from the reserve currency nation that is becoming increasingly irresponsible in the way it handles fiscal and monetary policies.

Running up the U.S. debt levels over the short term might be seen as innocuous by American politicians; but over the long term, the sustained inability and ineptitude of politicians to properly manage government spending will lead to a lack of belief in the country itself and, ultimately, in the reserve currency status.

Rome in its day held the reserve currency of the world, and how the mighty have fallen. Unless real changes are made, we might be witnessing the beginning of such a shift here. The rising U.S. debt levels are raising questions by many countries around the world as to the legitimacy and viability of the U.S. dollar as the reserve currency.

Politicians in Washington must wake up to the realization that the U.S. dollar’s status as a reserve currency is not written in stone. The financial markets are currently more dynamic and fluid than ever before. It takes only the click of a mouse to move money around the world.

Unless America gets its fiscal house in order, I believe we will see more agreements, such as this one with China and South Korea, which will avoid the U.S. dollar and increase the continuing questions about the viability of its reserve currency status.

Source: http://www.investmentcontrarians.com/u-s-dollar/more-cracks-appear-for-u-s-dollar-as-reserve-currency/1094/

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

zxc123
06 Dec 12, 17:57
The Dollar

The US Dollar is a major problem. There are ways for the US to manage the problem, such as rectifying the trade deficit.


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