Did someone say Dinar? What are the perspectives of the US Dollar as the global reserve currency?

April 21, 2011

What are the perspectives of the US Dollar as the global reserve currency?

One of the most scandalous and at the same time most successful investors in the world and a billionaire George Soros said during the recent “Bretton Woods II” conference that “the role of the US Dollar as the global reserve currency is gradually declining (its global circulation is declining as well).

According to George Soros, it is necessary to find an alternative currency that could replace the US Dollar in the global financial market. The Bretton Woods Agreements of 1944, that made the US a world currency, is outdated and needs to be replaced.

Is the US Dollar really losing its popularity as a global currency? What currency can replace it? Should it necessarily be the currency of some particular country or alliance like the EU? These questions have been analyzed by the experts of Masterforex-V International Trading Academy.
Is the US Dollar really a reserve currency?

What is a reserve currency? This is the currency of a certain country used by the central banks of most countries to compose their currency reserves. A reserve currency is used for international payments, as an investment asset, and in order to define the parity of other currencies. The following currencies are used as global currencies: the US Dollar (USD), the common European currency (EUR), the Japanese Yen (JPY), the Swiss Franc (CHF) and the British Pound (GBP).

In principle, the USA as the emitter of the global reserve currency strives to maintain the stability of the US Dollar and to avoid the balance-of-payment deficit.

Nouriel Roubini, a Nobel prize winner, anticipates the decline of the US Dollar because of the
USA’s huge balance-of-payment deficit and record sovereign debt. In mid-term perspective the US Dollar is expected to lose 15-20% of its value, especially against the so-called commodity currencies. It should be noted that Nouriel Roubini managed to foresee the latest financial crisis.

The amount of the uncovered paper dollars is growing. In 2005 there was $ 760B in global circulation. In late 2008 the amount reached $ 875B, 2/3 of which circulated outside the US. According to Robert Kiyosaki’s estimations, over the last 3 years the Fed Reserve has printed more paper money than over the entire remaining period if its existence.

Dr. Marc Faber, who is author of the Gloom, Boom and Doom report, forecast the total devaluation of the US Dollar within the next 10 years: in order to finance the huge budget deficit the Fed Res needs to print money all the time. The lending volume in the

USA is several times higher than the GDP volume.
The Financial Times reports that USD as the global reserve currency has created a dangerous imbalance in the world: other countries and central banks that have included the US Dollar and various US securities into their currency reserves have become the “hostages” of the US Administration.



The USA’s sovereign debt is growing exponentially. Over the last 6 years it has grown by almost 150% - from с $ 8B in 2005 up to $ 11B in 2011.
Reputable American investors, including W. Rogers, the founder of Quantum Fund, P. Shiff, the head of Euro Pacific Precious Metals, J. Christian, the CEO of СРМ Group, and many others warn the global community in the СРМ Group” investment bulletin that in 2011-2012 the US will face a new series of major economic shocks.

Last year China, which is the world’s biggest holder of the US T-bonds ($1,175B), started reducing the volume of the US T-bond purchases, preferring gold and the currencies of some developing countries.

Almost all the factors confirm that the US Dollar cannot be the global reserve currency any more. Can the entire world abandon USD?

Is there an alternative to the US Dollar?

Currently there is no alternative to the US Dollar as the global reserve currency.

For example, Nouriel Roubini thinks that no other major currency will be able to replace USD within the next 20 years: Euro-zone has difficult times while the economies of Japan, Great Britain and Switzerland are not as powerful as the American one. So they cannot ensure the stability of the global reserve currency.

The Chinese Yuan is only getting ready to become a global currency. According to some experts, this process may take up to 10-15 years as the Chinese currency is not liquid (flexible) enough. China is not interested in the fast revaluation of the Yuan as it will seriously damage the export-oriented Chinese economy.

The global reserves of gold are insufficient to get back to the Gold Standard

Michael Wexler of Maple Leaf Capital notes that over the last 1500 years before the US Dollar became the global reserve currency, numerous currencies acquired this status. The US Dollar came up to take the place of the weakened British Pound. According to historical data, the global reserve currency is changed every $50-150 years. So, Wexler assumes, that USD still has 30-40 years.

Among those counties that are the main holders of the US debt liabilities (including China, Russia and Japan) no one wants the US Dollar to stop being the global reserve currency because it will automatically devalue their reserves.

The US Administration is also not going to deprive the US national currency of the status because thanks to that they have an opportunity to cover a significant share of the budget deficit and to maintain the competitiveness of the American corporations in the international arena.
What can replace the US Dollar?

Numerous scientists and practitioners have been disputing for a long time over what could replace USD. Economists usually address politicians to help them as there shouldn’t be any pegging to the currency of a certain country. That is why a political solution is needed.

However, the relations between the world’s leading powers are far from being unclouded, and they are unlikely to change for the better in mid-term perspective.

All the suggested variants have their weak spots:


_SDR. The IMF’s monetary unit. It is not a currency and is based on the currency basket, including USD.

_Gold. It is the most reliable equivalent but it is not enough for all the countries.

_Crude Oil. During the Bretton Woods II conference George Soros said that oil is today’s full-fledged equivalent of the global currency. The problem is that these days the price of crude oil is expressed in dollars and mainly reflects the state of the US Dollar, which compensates the weakness of USD.

_Other currencies. We have just mentioned the Chinese Yuan – this is the matter of the distant future. Some experts say that in the near future the US Dollar may be replaced by regional currencies:

_The Chinese Yuan - for Asian-Pacific region, the Indian Rupee - for South Asia, the South-African Rand for Africa. The countries of the Middle East are planning to establish their own regional currency – Dinar. The US Dollar may turn into the regional currency of the Western hemisphere.

In any case, the currencies of the developing countries will become more significant in the international arena. They used to be borrowers. Now they lend loans to the world’s leading economies.According to the Department of studying Masterforex-V trading system , theoretically the current situation in the US should have caused significant price hikes in the country. However, USD is the world’s main reserve currency and the payment unit in the global trade.

That is why the inflation that should have emerged in the US just spread over the entire world.This is what they call “the export of inflation”. As most products are traded in dollars, the participants of the global market express their concerns over the USD exchange rate through reconsidering the prices on the major market products – commodities, agricultural products and financial assets – of other countries, mainly the developing ones.

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