Description
This is a PPT about Stability and strength of US dollar; Charts showing Exchange Rate of US Dollar in Euro, Great Britain Pound, Yen, Chinese renminbi; Alternative to US dollar
Alternatives to U.S. Dollar as International Reserve Currency
Money, Banking and Financial Markets
Introduction:
Reserve Currency is a foreign currency held by central banks of various countries and other major financial institutions as a means to pay off international debt obligations, or as a means to influence their domestic exchange rate. US dollar is currently used by most countries as a primary reserve currency. Euro, Pound Sterling, Yen and SDRs which is a basket of different currencies issued by IMF are also held by central banks as reserve currencies. The strength of reserve currencies depends on the demand the currency has from different countries. This depends on the amount of business that is performed between the countries using the currency and the perceived value of the currency as a good store of value.
Since 1970s, US dollar has been the most widely accepted currency. It also tends to be the international pricing currency for products traded on a global market, such as steel, aircraft, gold, oil, and other natural resources.
Recently there has been a debate to replace US dollar with other currencies as a primary reserve. The debate has exacerbated after the release of an essay by the governor of China?s central bank, Mr Zhou Xiaochuan before the G20 summit in March 2009 supporting a need for a new reserve currency. Russia has also been strongly propounding for a new world standard to move away from the current “ Unipolar world economic order”. The strongest support for this debate is from the United Nations Conference on Trade and Development (UNCTAD) which has also deemed that the current system of currencies and capital rules which binds the world economy is not working.
Reserve Status:
In 2008, the total foreign exchange reserves in the world is US million$ 6702323. Of the total reserves, reserves held as currencies is US million $ 4214100 or 62% of total reserves. Out of these, US million $2699135 is held in US Dollars, of which US million $1461944 is held by advanced economies and US million $1237190 is held by emerging economies. 65% of the reserve currencies in the world are held in US dollar. As depicted in Chart 1, reserves in US dollars were the highest in 1999 and 2000. The emerging economies held more than 70% of their reserves in US dollars till 2001.After 2001, the emerging economies have slowly increased their Euro reserves and decreased their US Dollar reserves as shown in
Chart 1 and Chart 2. Before the introduction of Euro, Deutsche Mark was the second most preferred currency for reserves. About 14% of the world reserves were in the form of Deutsche Mark in 1999. Preference for Euro has steadily increased from 17% world over in 1999 to 26% in 2008.Most noticeable is the increase in preference towards Euro in emerging economies where the percentage has increased from 18% in 1999 to 30% in 2008. It can also be noted that after 2003, the mix in currency preferences seem to have stabilised. There have been no dramatic changes in currency composition of the world?s foreign exchange reserves since 2003. This shows that even though the popularity of Dollar has decreased it is still remains the dominant choice for reserve currency. Chart 1:
Percentage of Currency Reserves in US Dollars
Source: IMF
80% 70% 60% 50% 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 World Reserves Advanced Economies Emerging and Developing Economies
Chart 2:
Percentage of Currency Reserves in Euros
Source: IMF
35% 30% 25% 20% 15% 10% 5% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
World Reserves
Advanced Economies
Emerging and Developing Economies
Stability and Strength of US Dollar:
Fluctuation of Exchange rate of a currency is a good indication of the stability of the currency. From chart 3 it is seen that exchange rate of US dollar has declined against the euro over the years from 1999 onwards. The dollar has depreciated about 33% from its high in 2001 to about 0.7 Euro. This shows the increasing strength and acceptance of Euro in the world Economy.
As show in chart 4 and chart 5, the dollar has depreciated about 14% against the GBP and about 20% against the Japanese yen since 2000. This is again an indication of the growing weakness of the US dollar. The Chinese Renminbi is pegged against various currencies. Chart 6 shows that the US dollar has depreciated against Renminbi by about 14% since 2005. The fluctuations in exchange rates has a has a direct impact on the store value of the foreign exchange reserves of a country. A depreciating reserve currency means that the real value of the reserves is declining.
Chart 3:
Exchange Rate of US Dollar in Euro
Source: European Central Bank
1.4 1.2 1 0.8 0.6 0.4 0.2 0
Chart 4:
Exhange Rate of US Dollar in Great Britain Pound
Source: European Central Bank
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
Chart 5:
Exchange rate of US dollar in Japanese Yen
Source: European Central Bank
160 140 120 100 80 60 40 20 0
Chart 6:
Exchange Rate of US Dollar in Chinese Renminbi
Source: European Central Bank
9 8 7 6 5 4 3 2 1 0 04/05/2005 04/05/2006 04/05/2007 04/05/2008 04/05/2009
Hence if the US Dollar continues to depreciate against other currencies, Countries may be forced to change their mix of foreign currency reserves.
Strength of a currency also depends on the backing it has. The backing for US dollar is the credit worthiness of government of USA. The report “A Citizen?s Guide to the 2008 Financial Report of the U.S. Government” by the Department of the treasury, USA gives a clear understanding of the US government?s credit worthiness.
The fiscal deficit of US government has doubled in 2008 to US Billion $454.8 from $162.8 in 2007(Chart 7). This deficit does not include the actions taken by the US government to contain the current economic crisis. In 2009, the Budget deficit is expected to further increase. The Budget Deficit is financed by public debt . Of the Government?s total debt of about $10 trillion at the end of FY 2008, approximately $5.8 trillion was debt held by the public in the form of Treasury securities, such as bills, notes, and bonds. The „public? consists of individuals, corporations, state and local governments, Federal Reserve Banks, and foreign governments. The projections from the US treasury indicate that the current Public Debt is not sustainable with the current economic policies (Chart 8). The publicly held debt-to-GDP
ratio has ranged from 35 to 37 percent for most of this decade. The 2008 ratio of 40.8 percent is the highest since 1999, but is still far below the nearly 50 percent ratio of the mid-1990s.
US has a relatively low savings rate and hence the U.S. economy depends heavily on foreign capital inflows from countries with high savings rates to help promote growth and to fund the federal budget deficit. China has intervened heavily in currency markets to limit the Renminbi?s appreciation. As a result, China has become the world?s largest and fastest growing holder of foreign exchange reserves As on July 2009, China holds US Billion $ 800.5 in US treasury securities and Japan holds US Billion $ 724.5. This is one of the main reasons for Chinas unrest regarding the US Dollar. Chart 7: Source: “A Citizen?s Guide to the 2008 Financial Report of the U.S. Government” by the Department of the treasury, USA.
Chart 8: Source: “A Citizen?s Guide to the 2008 Financial Report of the U.S. Government” by the Department of the treasury, USA.
It would suit China to currently follow Dollar standard as a wide acceptance of dollar means a strong dollar which in turn would mean that China reserves are not depreciated. But with the increasing federal debt, the US may face an unsustainable economy and hence in the long run, the US dollar may further depreciate.
Alternative to US Dollar:
Euro and SDR have been projected as an alternative for the US Dollar as reserve currency. According to governor Zhou Xiaochuan “The desirable goal of reforming the international monetary system, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”. Euro has definitely shown increased acceptance in the recent years, but it would not be easy for Euro to replace the US dollar as an the international pricing currency. But the basic problem associated with US dollar is that it is based on the credit worthiness of a nation. This problem is somehow reduced by using Euro which is a currency for a group of nations but does not completely eliminate it. This is because although it is not based on the credit worthiness of one single nation, however the strength of the Euro depends on the credit
worthiness of the 16 member nations of the European union for which Euro is used as the official currency. Thus we see that using Euro as a reserve currency does reduce the problems associated with the U.S. dollar, but the problem is however not eliminated. The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries? official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. Currently, the SDR is largely an artificial unit used by governments and international institutions. Several improvements in the international monetary system would be necessary to introduce SDR as a reserve currency. Creation of financial assets denominated in SDR like SDR denominated securities, expansion of the basket of currencies forming the basis of valuation of SDR are some of the steps suggested by Governor Zhou to improve the acceptance of SDR. These measures would take considerable time and effort.
Conclusions:
US dollar has wide acceptance in the world as a reserve currency. But the large federal debt of the US government and the depreciating US dollars are causes for concern for the international monetary system. A super sovereign reserve currency is necessary to dissociate the nation specific risks associated with reserve currencies like US dollar or the Euro. SDR seems to be a feasible option in the long run. Implementation of such move would solicit considerable time and effort.
References: 1. www.imf.org 2. www.ustreas.gov 3. “A Citizen?s Guide to the 2008 Financial Report of the U.S. Government” by the Department of the treasury, USA. 4.http://www.ecb.int/home/html/index.en.html 5. www.wikipedia.com 6. www.investopedia.com 7.http://www.reuters.com/article/usDollarRpt/idUSN0627861320090708 8.http://online.wsj.com/article/SB123780272456212885.html 9.http://www.telegraph.co.uk/finance/...nts-new-globalcurrency-to-replace-dollar.html 10.http://www.chinadaily.com.cn/bizchina/2009-03/23/content_7607627.htm
doc_973847283.docx
This is a PPT about Stability and strength of US dollar; Charts showing Exchange Rate of US Dollar in Euro, Great Britain Pound, Yen, Chinese renminbi; Alternative to US dollar
Alternatives to U.S. Dollar as International Reserve Currency
Money, Banking and Financial Markets
Introduction:
Reserve Currency is a foreign currency held by central banks of various countries and other major financial institutions as a means to pay off international debt obligations, or as a means to influence their domestic exchange rate. US dollar is currently used by most countries as a primary reserve currency. Euro, Pound Sterling, Yen and SDRs which is a basket of different currencies issued by IMF are also held by central banks as reserve currencies. The strength of reserve currencies depends on the demand the currency has from different countries. This depends on the amount of business that is performed between the countries using the currency and the perceived value of the currency as a good store of value.
Since 1970s, US dollar has been the most widely accepted currency. It also tends to be the international pricing currency for products traded on a global market, such as steel, aircraft, gold, oil, and other natural resources.
Recently there has been a debate to replace US dollar with other currencies as a primary reserve. The debate has exacerbated after the release of an essay by the governor of China?s central bank, Mr Zhou Xiaochuan before the G20 summit in March 2009 supporting a need for a new reserve currency. Russia has also been strongly propounding for a new world standard to move away from the current “ Unipolar world economic order”. The strongest support for this debate is from the United Nations Conference on Trade and Development (UNCTAD) which has also deemed that the current system of currencies and capital rules which binds the world economy is not working.
Reserve Status:
In 2008, the total foreign exchange reserves in the world is US million$ 6702323. Of the total reserves, reserves held as currencies is US million $ 4214100 or 62% of total reserves. Out of these, US million $2699135 is held in US Dollars, of which US million $1461944 is held by advanced economies and US million $1237190 is held by emerging economies. 65% of the reserve currencies in the world are held in US dollar. As depicted in Chart 1, reserves in US dollars were the highest in 1999 and 2000. The emerging economies held more than 70% of their reserves in US dollars till 2001.After 2001, the emerging economies have slowly increased their Euro reserves and decreased their US Dollar reserves as shown in
Chart 1 and Chart 2. Before the introduction of Euro, Deutsche Mark was the second most preferred currency for reserves. About 14% of the world reserves were in the form of Deutsche Mark in 1999. Preference for Euro has steadily increased from 17% world over in 1999 to 26% in 2008.Most noticeable is the increase in preference towards Euro in emerging economies where the percentage has increased from 18% in 1999 to 30% in 2008. It can also be noted that after 2003, the mix in currency preferences seem to have stabilised. There have been no dramatic changes in currency composition of the world?s foreign exchange reserves since 2003. This shows that even though the popularity of Dollar has decreased it is still remains the dominant choice for reserve currency. Chart 1:
Percentage of Currency Reserves in US Dollars
Source: IMF
80% 70% 60% 50% 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 World Reserves Advanced Economies Emerging and Developing Economies
Chart 2:
Percentage of Currency Reserves in Euros
Source: IMF
35% 30% 25% 20% 15% 10% 5% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
World Reserves
Advanced Economies
Emerging and Developing Economies
Stability and Strength of US Dollar:
Fluctuation of Exchange rate of a currency is a good indication of the stability of the currency. From chart 3 it is seen that exchange rate of US dollar has declined against the euro over the years from 1999 onwards. The dollar has depreciated about 33% from its high in 2001 to about 0.7 Euro. This shows the increasing strength and acceptance of Euro in the world Economy.
As show in chart 4 and chart 5, the dollar has depreciated about 14% against the GBP and about 20% against the Japanese yen since 2000. This is again an indication of the growing weakness of the US dollar. The Chinese Renminbi is pegged against various currencies. Chart 6 shows that the US dollar has depreciated against Renminbi by about 14% since 2005. The fluctuations in exchange rates has a has a direct impact on the store value of the foreign exchange reserves of a country. A depreciating reserve currency means that the real value of the reserves is declining.
Chart 3:
Exchange Rate of US Dollar in Euro
Source: European Central Bank
1.4 1.2 1 0.8 0.6 0.4 0.2 0
Chart 4:
Exhange Rate of US Dollar in Great Britain Pound
Source: European Central Bank
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
Chart 5:
Exchange rate of US dollar in Japanese Yen
Source: European Central Bank
160 140 120 100 80 60 40 20 0
Chart 6:
Exchange Rate of US Dollar in Chinese Renminbi
Source: European Central Bank
9 8 7 6 5 4 3 2 1 0 04/05/2005 04/05/2006 04/05/2007 04/05/2008 04/05/2009
Hence if the US Dollar continues to depreciate against other currencies, Countries may be forced to change their mix of foreign currency reserves.
Strength of a currency also depends on the backing it has. The backing for US dollar is the credit worthiness of government of USA. The report “A Citizen?s Guide to the 2008 Financial Report of the U.S. Government” by the Department of the treasury, USA gives a clear understanding of the US government?s credit worthiness.
The fiscal deficit of US government has doubled in 2008 to US Billion $454.8 from $162.8 in 2007(Chart 7). This deficit does not include the actions taken by the US government to contain the current economic crisis. In 2009, the Budget deficit is expected to further increase. The Budget Deficit is financed by public debt . Of the Government?s total debt of about $10 trillion at the end of FY 2008, approximately $5.8 trillion was debt held by the public in the form of Treasury securities, such as bills, notes, and bonds. The „public? consists of individuals, corporations, state and local governments, Federal Reserve Banks, and foreign governments. The projections from the US treasury indicate that the current Public Debt is not sustainable with the current economic policies (Chart 8). The publicly held debt-to-GDP
ratio has ranged from 35 to 37 percent for most of this decade. The 2008 ratio of 40.8 percent is the highest since 1999, but is still far below the nearly 50 percent ratio of the mid-1990s.
US has a relatively low savings rate and hence the U.S. economy depends heavily on foreign capital inflows from countries with high savings rates to help promote growth and to fund the federal budget deficit. China has intervened heavily in currency markets to limit the Renminbi?s appreciation. As a result, China has become the world?s largest and fastest growing holder of foreign exchange reserves As on July 2009, China holds US Billion $ 800.5 in US treasury securities and Japan holds US Billion $ 724.5. This is one of the main reasons for Chinas unrest regarding the US Dollar. Chart 7: Source: “A Citizen?s Guide to the 2008 Financial Report of the U.S. Government” by the Department of the treasury, USA.
Chart 8: Source: “A Citizen?s Guide to the 2008 Financial Report of the U.S. Government” by the Department of the treasury, USA.
It would suit China to currently follow Dollar standard as a wide acceptance of dollar means a strong dollar which in turn would mean that China reserves are not depreciated. But with the increasing federal debt, the US may face an unsustainable economy and hence in the long run, the US dollar may further depreciate.
Alternative to US Dollar:
Euro and SDR have been projected as an alternative for the US Dollar as reserve currency. According to governor Zhou Xiaochuan “The desirable goal of reforming the international monetary system, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”. Euro has definitely shown increased acceptance in the recent years, but it would not be easy for Euro to replace the US dollar as an the international pricing currency. But the basic problem associated with US dollar is that it is based on the credit worthiness of a nation. This problem is somehow reduced by using Euro which is a currency for a group of nations but does not completely eliminate it. This is because although it is not based on the credit worthiness of one single nation, however the strength of the Euro depends on the credit
worthiness of the 16 member nations of the European union for which Euro is used as the official currency. Thus we see that using Euro as a reserve currency does reduce the problems associated with the U.S. dollar, but the problem is however not eliminated. The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries? official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. Currently, the SDR is largely an artificial unit used by governments and international institutions. Several improvements in the international monetary system would be necessary to introduce SDR as a reserve currency. Creation of financial assets denominated in SDR like SDR denominated securities, expansion of the basket of currencies forming the basis of valuation of SDR are some of the steps suggested by Governor Zhou to improve the acceptance of SDR. These measures would take considerable time and effort.
Conclusions:
US dollar has wide acceptance in the world as a reserve currency. But the large federal debt of the US government and the depreciating US dollars are causes for concern for the international monetary system. A super sovereign reserve currency is necessary to dissociate the nation specific risks associated with reserve currencies like US dollar or the Euro. SDR seems to be a feasible option in the long run. Implementation of such move would solicit considerable time and effort.
References: 1. www.imf.org 2. www.ustreas.gov 3. “A Citizen?s Guide to the 2008 Financial Report of the U.S. Government” by the Department of the treasury, USA. 4.http://www.ecb.int/home/html/index.en.html 5. www.wikipedia.com 6. www.investopedia.com 7.http://www.reuters.com/article/usDollarRpt/idUSN0627861320090708 8.http://online.wsj.com/article/SB123780272456212885.html 9.http://www.telegraph.co.uk/finance/...nts-new-globalcurrency-to-replace-dollar.html 10.http://www.chinadaily.com.cn/bizchina/2009-03/23/content_7607627.htm
doc_973847283.docx