The big question everywhere is, where is the dollar headed with a significant percentage expecting a rapid depreciation bordering on a collapse.
There have been noises to question the anchor role of the currency and the inherent benefits which the US enjoys from the IMF, the Chinese, earlier by the Russians and even by some thought leaders. This was followed by a dutiful depreciation of the US Dollar and several articles ridiculously charting an imminent demise of the dollar. They have been fuelled by the excesses of the current US Fed as it went on unbridled. So is the end imminent …??
The US economy given its sheer size will remain the largest for the coming few decades. While there are bound to be catch up stories as China grows and so does India, but putting it into perspective the US economy will be more than double the Chinese in 2020. In addition there is a yawning technological gap to be bridged between US and rest of the world.
The hoards of US dollars which China, Japan, Russia, India and many markets have accumulated over the years are a major factor. Any quick shift especially in the large ones will be shooting oneself in the foot.
Then there is the basic issue of the need for the liquidity of these reserves. Though countries keep them to facilitate trade and to guard against rate fluctuations of the more important ones but given the sheer size of the investments, the prime issue remains of liquidity of such holdings. The US dollar denominated assets are the most liquid. No wonder therefore, the world flew to dollar when the crises set in.
So what are the alternatives - the Euro is the most prominent, which by default came into existence to give a compete to the predominance of the US Dollar. Since then it has gained in acceptance but most of the world trade and reserves continue to be in US Dollars.
There is subtle but no less significant yearn in the Chinese heart to have the Renminbi as an anchor currency but this is still many decades away, if at all. Despite all the noises they have made, will Russia or Brazil be comfortable holding their reserves in Renminbi, I think not.
Then comes the IMF issued internationally backed currency the SDRs. They have immense inherent flaws, (which will take up a full blog post to cover) and may probably not see significant use.
To conclude, the short run will remain volatile in line with demand supply mechanics and will see further depreciation of the dollar in a move to kick start domestic economy and bring about a " recovery with jobs " as Obama has been often stating.
The long term will see continued acceptance of the US dollar despite its flaws. It has significant advantages over others and will remain a dominant currency for decades to come. It will most likely witness a gradual decline in time and co-exist with other major currencies like the Euro and Yuan in their spheres of influence.
