The epicenter of the recent recession is undoubtedly
the United States of America but this financial contagion affected the entire
world in different magnitudes. In
Europe, the crisis led to the other crisis which impacted them in a real hard
way and it is now becoming extremely tough for them to come out of this
situation, on the other hand the developing countries combated the American
crises comfortably but the impact on their financial health is quite palpable
and deplorable. BRICS definitely need a life supporting system for survival at
this point of time in terms of rapid public investment, more employability and
steep reduction in deficits but for all of it to happen the emerging economies
has to reign in the depreciation of their currencies.
And in the mean time after the American sovereign’s
downgrade it was somewhat nice to predict that the capital flow in emerging
economies was inevitable and which would boost the financial health of the
countries, a perplexing situation emerged which led the global investors to
flock into the (USA- where it all started) US dollar, which was considered as a
safe haven and the other currencies depreciated rapidly.
This was a stark reminder of the grim reality
confronting the world – the lack of a credible alternative to the US dollar
even as the fundamentals of the US economy are no longer as strong as earlier. Though
because of immense liquidity of markets in dollar assets, the depth of the
markets in dollar assets that results in tight bid ask ratio and wide-spread
availability of derivatives to hedge dollar exchange-rate risk, proves that US
dollar is the currency superpower but there are many economists who believe
that the dollar’s hegemony wont sustain for long from now on. “The Economist” has
recently estimated that USA has lost ten years of economic progress because of
the Great Recession meaning that its economy is back to where it was in 2002.
And secondly “Triffin Dilemma” has become acute for USA with an urgent need to
curb its twin deficits.
It is likely that the US Dollar will no longer enjoy
a pre-eminent status but will share it with other currencies. The Australian
Dollar, the Canadian Dollar, the Swiss Franc and the Scandinavian currencies
have all attracted safe haven flows in recent years with central banks
increasingly diversifying their foreign exchange reserves into these
currencies\assets. But by far the most serious challenge to the dollar today is
posed by the Chinese Renminbi.
China has taken several strategic steps to promote
international use of its currency. Entering into currency swap arrangements
with several developing countries in Asia and Africa. In April 2011 China led
BRICS initiative to establish mutual lines of credit in local currencies to
protect intra-BRICS trade from foreign exchange risk. Trade settlement is only
one of the steps in internationalizing the Renminbi. In January 2011, Bank of
China started offering Renminbi deposit accounts in New York and also took
steps that included in approving the use of Renminbi for FDI in China.
Though China is trying its best to make its currency
the next internationally accepted currency but it fails to meet several
criteria normally required of a reserve currency such as full convertibility,
deep and liquid bond markets and secure legal structure in the country.
This shows that the stage is now set for the
emergence of multi-currency based global financial system with several
currencies competing for dominance and no single currency having the
overwhelming status enjoyed by the US Dollar since World War II.
Source:
- · Article - Currency Conundrum in “The Indian Banker”, June 2012 by Mr.Radha Syam Ratho.
- · Article on Shadow Currency by Mohi-uddin, http://www.ft.com/intl/cms/s/0/c70e236a-bcfd-11e0-bdb1-00144feabdc0.html.
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