For decades the gold standard reserve currency of the world has been the American dollar, but now as Eva Szalay and Colby Smith report for the Financial Times, that preeminent role may be at risk. They write:
The US dollar has long towered over global markets and finance. But cracks are starting to appear in the edifice.
The greenback’s pre-eminent role in official funds and international trade is formidable and unlikely to fade quickly. But the latest data from the IMF on central banks’ reserves show a subtle shift away from the dollar that analysts say could signal a rethink on the political risk embedded into US assets.
“Central banks [are] chipping away at the dollar’s ‘exorbitant privilege’,” said Alan Ruskin, chief international strategist at Deutsche Bank in New York. “Politics are starting to infringe in ways that have the potential to challenge the dollar’s dominance.”
In last month’s quarterly report on central banks’ reserves, the IMF said that the share of the global total denominated in dollars was just short of 62 per cent in the second quarter of this year, down 0.76 percentage points from the same period a year earlier. Euro-denominated reserves account for 20 per cent.
While the dip is small, the apparent resilience is deceptive. As Mr Ruskin pointed out, the dollar was, during that quarter, the highest-yielding currency in the developed world. In theory, that should have lured in investment at a faster pace than other currencies.
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