By Dian L. Chu, Economic Forecasts & Opinions
The practice of accumulating dollar reserves by the central banks has become more pronounced after the 1997 Asian financial crisis, when currency speculators hastened a balance of payments crisis in Thailand, Indonesia and South Korea by demanding dollars for local currency, depleting the central banks' dollar reserves.
Fast forward 13 years later, the dollar's status as the world's preferred reserve currency has come into question amid a ballooning budget deficit that keeps the U.S. dependent on foreign financing. Both Russia and China last year suggested a type of "super-sovereign reserve currency" to challenge the dollar, while Brazil and India also discussed substituting other assets for their dollar holdings.
IMF - "That Day Has Not Yet Come"
Reigniting the argument, Dominique Strauss-Kahn, the head of the International Monetary Fund (IMF), said last Friday that it would be "intellectually healthy to explore" the creation of a new global reserve currency to reduce dependence on the dollar.
Mr. Strauss-Kahn did say there could be a globally issued reserve asset some day, but "that day has not yet come." However, his remarks signaled broader concern over the dominance of the dollar, and "the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country."
All these beg the question - Who could be the next global reserve currency succeeding the dollar?
Dollar Reserve - A Decade of Decline
The most recent foreign exchange report from the U.S. Treasury Dept. shows that the dollar reserve holding percentage has been on a steady decline - even before the financial crisis. As of 2009, the dollar still comprised about 60% of foreign reserves, compared with less than 30% for the euro, followed far behind by the pound and the yen. (see graph)
According to the Peterson Institute for International Economics, although the dollar remains the most important reserve currency over the last ten years through the first quarter of 2009, adjusting for the exchange rate effects, the dollar's share in foreign exchange reserves has declined on balance 4.3%.