Publié par : crise2007 | octobre 30, 2007

Euro could replace Dollar as a reserve currency

Euro could replace Dollar as a reserve currency

By Renisha Chainani
n the interview published in Stern magazine, Alan Greenspan (former FED Chief) said it was “absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency.”

If the former chairman’s words prove true, the dollar’s present downward slide will continue. Greenspan noted that at the end of 2006, two thirds of all currency reserves were held in dollars, as opposed to 25 percent for the euro. If central banks continue to increase euro proportions at the expense of the dollar, demand for the dollar will fall and excess dollar supplies could start flooding the market.

In fact, this trend is already under way, as evidenced by the recent breakdown in the dollar’s value. Iran’s central bank governor has said that the country has completed the process of diversifying its external reserves away from the dollar. Iran’s move to diversify away from the dollar has been partly motivated by political tensions with the US and partly due to the weakness of the dollar in the past two years.

In recent months, the dollar has hit all-time lows against the euro and multi-decade lows against many other currencies. The dollar has also reached new lows against oil and wheat, and a 28-year low against gold.

On an average, Dollar has depreciated around 10% against major curriences from year to date and this is expected to continue. Greenspan also stated that although more countries still use the dollar as a reserve currency, the greenback doesn’t actually have “all that much of an advantage” over the euro any longer.

In terms of cross-border trade, the dollar accounts for 43 percent, while the euro is used in 39 percent of such transactions. Loss of the dollar’s reserve currency status would be a huge blow to the United States. It would drastically undermine the dollar’s value and cause Americans to lose many unique economic blessings that they have become used to. Economic conditions in the U.S. may be about to radically change.

Renisha Chainani is a Commodity Research Analyst with Anagram Comtrade Ltd, Ahmedabad

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