Which Currency Has the Ability to Replace the USD ?
It is crucial in FX markets for traders to choose currencies for trading and predict its future in order to be prepared from upcoming events.
With the fear of a global recession looming once again, it would seem that the lessons of a few years ago have not been learnt. The question is though which currency has the ability to replace the USD in case of the dramatic crisis in the US?
Considering the last discussions in Congress of the US regarding the debt ceiling of the country, we can assume that it can turned out to be that the US can meet default in nearest future.
However nowadays we do not have a definite currency pretending to replace the USD as reserve currency in FX Markets.
Therefore this article analyzes probability of different currencies to become a candidate to play the role of global reserve currency.
Extremely exciting currency for most of traders is EUR. Some traders may say that EUR can replace the USD as reserve currency. But we see that Eurozone have a lot of problems within its territory (Greece, Italy, Portugal), which sometimes become global from local size, because it can even lead to collapse of European Union. The problem is that the Eurozone do not have unique fiscal and monetary policy, while they have a unique currency. Besides, economic development level of the countries is different. Therefore I resume that EUR can’t play the role of global reserve currency in nearest future.
Some traders vote for Yuan to be a global reserve currency. China’s economy is largely dependent on exports. It is also true that it has a large domestic consumer base due to its population. The biggest advantage that the Chinese economy enjoys from its export is the cost of production due to cheap labor. Today the global problem is that the economies are heavily leveraged and in real sense there is less cash money available against the amount of money borrowed. The ration of leverage in 2008 was 10 to 1. The difference between today and yesterday is that yesterday the quantum was small and therefore manageable. Today the size is huge and may not be manageable, it is also exposed. Interestingly the Western world has always criticized China’s domestic political structure and one-party rule. But China with a broad smile in its face has been growing at the rate of 8-10 pct since last two decades. In spite of it, we should keep in mind that reserve currency should have transparent structure of economy. Considering the monetary and political transparency level of China Yuan can barely pretend to play the role of global reserve currency.
Other traders can support SDR (Special Drawing Rights) to be a global reserve currency. But SDRs are supplementary foreign exchange reserve assets defined and maintained by International Monetary Fund (IMF). It is not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchange. As they can only be exchanged for EUR, Japanese yen, GBP, or US dollars, we resume that they can’t be reserve currencies now.
There are two currencies which have big chances to play a role of reserve currency in FX markets: GBP and CHF, due to economic power and political factors. But as we discussing about nearest future these currencies also are not ready to be leading currency in the world as USD.
Therefore global economic wheel for this moment of economic evolution of foreign exchange market will be remained the same, I mean that in spite of economic and political problems in the US, it still remains the most powerful country in the world and there is no any currency except USD to replace it.
P.S. This article analyzes only currency, however yellow metal has a big chance to replace the USD, but it will be discussed in next articles.