Rhody Trader

The whole “The dollar shouldn’t be the only choice for global reserve currency” discussion is active again today thanks to the BRIC summit. This, of course, has been a running theme in the markets for some time now, with China and Russia being the two main instigators to start. The communique from today”s meeting made the following statement:

…there is a strong need for a stable, predictable and more diversified global monetary system…

This is basically a nothing statement. As Ducati and others have commented, there are all kinds of motivations for all this.

As has been stated repeatedly for months now, there’s basically no chance of any other currency. The reason the USD is at the top of the heap is because of the breadth and depth of the US financial markets and the relative social/political stability of the country. These aren’t things which can be easily or quickly replicated. Any move to create a second reserve currency would require building deeper regional financial markets, perhaps by merging them geographically. The Eurozone has moved in that direction with exchange mergers, but is still well behind the volume done by US institutions.

Even if something like IMF drawing rights, or some other multi-national institution, is used as the basis for a new currency there is still the question of why money would move  into them. Countries, companies, and institutions do trade in the USD and invest in USD-demononated assets. While an IMF “currency” could perhaps be developed for trade, there’s still not nearly enough of an underlying financial or asset structure in which investments could be made.

The USD is certainly bound to be progressively less influential over time. If, however, you see short-term reactions to “lets ditch the dollar” comments then you’re probably seeing a good fade opportunity, or just the market using it as an excuse to sell greenbacks.

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