C.P. CHANDRASEKHAR
The dollar lacks the legitimacy to serve as the world’s reserve, but there is no national currency that can displace it as yet.
DANIEL ACKER/BLOOMBERG
John Lipsky (left), First Deputy Managing Director, and Dominique Strauss-Kahn, Managing Director, of the IMF in Istanbul on October 2. Lipsky has suggested that the SDR can be used as the foundation to build a new currency that would “be delinked from other currencies and issued by an international organisation with equivalent authority to a central bank in order to become liquid enough to be used as a reserve”.
IF time lag matters, news of the dollar’s demise as the world’s principal reserve currency is grossly exaggerated. That prediction has been heard periodically at least since the early 1970s when the United States brought to an end the Bretton Woods arrangement by breaking the link between the dollar and gold. As is obvious, whatever else may be said of the U.S.’ role in the world system, this expectation of the dollar’s displacement as the currency that is as good as gold has not materialised.
This, however, is not to say that the dollar fulfils its role adequately or even satisfactorily. Not surprisingly, with the strength of the U.S. economy once again in question, the dollar has begun to slide. The euro, between its low of 1.2932 to the dollar on April 21, 2009, and its value at the end of September 2009, has appreciated by 13 per cent vis-a-vis the dollar. This (and other similar tendencies) has triggered predictions of the demise of the dollar as the lead currency. Should and will a new currency replace the dollar as the paper that is treated as good as gold?
A noteworthy feature of the debate on the dollar’s worthiness as a reserve currency is that most people who say it is time for the dollar to go, do not base their argument on the greater strength of an alternative currency (such as the euro, the yen or the Chinese renminbi) that should take the dollar’s place. Rather, their alternative is the International Monetary Fund’s (IMF) Special Drawing Right (SDR), which is more a unit of account than a currency and which derives its value from a weighted basket of four major currencies.
There are three implications here. First, even when the weakness of the U.S. and the dollar is accepted, the case is not that the dollar should be completely displaced; even in the basket that constitutes the SDR the dollar commands an influential role. Second, there is no other country or currency that is capable of taking the place of the U.S. and its dollar at least in the near future. And third, the search is not for a currency that can be used with confidence as a medium of international exchange but for a derivative asset that investors can hold without fear of a substantial fall in its value when exchange rates fluctuate, because its value is defined in terms of, and is stable relative to, a basket of currencies.
EURO CHALLENGE