Over the past few years, there has been a lot of talk about whether a new currency will replace the U.S. dollar as the global reserve currency. I have often repeated my opinion that this possibility will not become reality over the next 10 years. However, we cannot underestimate the importance of the euro and the Chinese Yuan and the fact that they will become a more widely used currencies over the next few years.
In my article yesterday, Could America Lose Its Triple A Rating, I talk about how a ratings downgrade of U.S. debt would be the perfect excuse to push through an alternative reserve currency to replace the dollar because it would strip the confidence of sovereign funds.
In the NY Times yesterday, Nouriel Roubini touches on this point in detail:
Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.
But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.
I encourage you to read the entire Op-ed article The Almighty Renminbi?