Dollar dominance

The strength and unassailability of the US dollar has meant that it has long been the currency of choice for those seeking a solid means of securing their reserve of cash an argument convincing enough for drug smugglers and central banks alike. The dollars strength,paradoxically,enabled recklessness in the US,as it spent beyond its means,paying for its current expenditure thanks to the worlds apparently inexhaustible demand for dollar-denominated debt. It is this cosy system thats had a hole poked in it,thanks to the downgrade of US treasury debt from AAA to AA+.

Its worth noting that an AA+ rating is better than most countries manage. Of the major countries that remain AAA,France,Germany and the UK are encumbered with responsibilities towards their high-spending fellow Europeans to the south,a fact which doesnt inspire confidence in the euro or the pound. Debt-laden Japan is currently AA-,and Chinas financial system is too closed-off and limited to be sufficiently attractive to investors. China has been particularly vocal,though calling for an end to the dollars reserve status is a drumbeat that it,and Russia,take up whenever the US stumbles. Yet,when the dollars competitors are objectively sized up,it becomes difficult to imagine how that status could be challenged by another national currency in the short or medium term.

Other suggestions have been floated. The IMF would like to see central banks shift to using its special drawing rights,or SDRs,which represent a claim on the currencies of all IMF members,and are market-tradeable; the Fund believes an SDR-based world would be more stable. If not SDRs,we might well see major holders move to a basket of international currencies in the medium term. When the Union Bank of Switzerland surveyed 80 central bank reserve managers last month,more than half said they expected a portfolio of currencies to become the standard unit of reserves over the next quarter-century. Nothing may change immediately; but we may be beginning to see the first cracks in the dollars decades of domination.