US dollar still the dominant global reserve currency

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LONDON — US dollar will remain the dominant global reserve currency for the foreseeable future, despite gradual progress of alternatives such as the Chinese renminbi, and will continue to play an important role in Moody's credit view of the United States, Moody's Investors Service said in a report Wednesday.

The report, "Sovereigns - Global: Currency composition of foreign reserves continues to change only gradually, with any major shifts likely years away", said reserve currencies need to be stable and are expected to hold relative value through business cycles and asset price volatility. Governments that issue reserve currencies enjoy greater liquidity which gives rise to greater access to capital. However these countries must also contend with the trade impact of unusually strong demand for their fiat money.

The central banks issuing reserve currencies are essentially able to set financing conditions beyond their constituency due to the strong and consistent demand for their currency.

"The transparency of the US financial markets as well as the stability and predictability of US monetary policy reinforce the safe-haven legacy that the US dollar holds," said Colin Ellis, Moody's Chief Credit Officer EMEA and co-author of the report.

Overall, the ranking of global reserve currencies has displayed little change over the past decade. Despite seeing the largest proportional all, the euro ranks second with a share of 20% -- the US dollar retaining top position with a current share of 63%. Future demand for the euro will depend on the strength of its institutions and risk mitigation mechanisms.

Generally, reserve currencies are expected to appreciate during a financial crisis as the demand for safe-haven hedges increase. However, this was not the case for the UK's pound sterling in the previous global crisis, which could suggest the status of the pound as a reserve currency is based on its inherited position from the pre-Bretton Woods colonial era and not representative of the current market view.

Increased linkages between China and other countries will heighten the use of renminbi as a medium of exchange, but a broader opening of China's capital account would require restructuring of China's financial system. It will likely be several decades before the global status of theUS dollar is challenged by any currency. — SG


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