Moody’s assessed the prospects of the loss of the dollar’s world domination :: Economy :: RBC

Over time, the need for the use of the dollar in global trade may decline and its share in the reserves of the countries to shrink, however, this alternative currency should increase its appeal, says Moody’s

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Domination for decades

The intensification of regional trade and new currencies such as the yuan a reserve status can lead to the fact that countries will be less reason to use as a reserve currency geographically distant States. As a result, the need for the use of the dollar in global trade may decline, and the structure of world currency reserves will undergo significant changes. But now the dollar provides the convenience and price advantage in international trade, and its share in global reserves has remained inaccessible to alternative currencies. It will be decades before the world’s Central banks will be able to change these proportions, predicts Moody’s Investors Service. Overview of Agency analysts Georgina Smartt and Colin Ellis enrolled at RBC.

The dollar is the de facto world reserve currency for over 60 years and will remain so in the foreseeable future, experts say. It accounts for 63% of global foreign exchange reserves, the second place — Euro (20%), according to the IMF. The share of any other counterparts does not reach 5%, and the potential for their release in the first place in the world is limited due a number of factors, they argue.

The dominance of the dollar stable despite the global recession, defaults of different States, the increasing role of China in global trade and the emergence of the Euro, the survey suggests. The key to the attractiveness of a reserve currency is in its exceptional stability: country of Issuer should be considered resistant to the financial crisis, and access to its currency should provide free and convenient conditions for trade and financial transactions. This stability comes from a number of factors: the size of the American economy, the country’s role in world trade, the transparency of the us financial market and the predictability and reliability of monetary policy. In addition, the current structure of the US economy provides stability to the trade deficit, which is an additional support for the dollar, said Moody’s.

Backup advantages

The status of the Issuer of the reserve currency, in turn, provides countries with additional credit benefits. They are easier to attract borrowing, taking advantage of greater market liquidity, says Moody’s.

In addition, reserve currency, tend to retain the relative cost during business cycles, and in the context of price volatility. The countries–issuers of reserve currencies also have to respond to excessive demand for money leads to a rise in the exchange rate, causing a rise in exports.

The prospects of competitors

The difficulty of competition with the dollar for global supremacy can be traced on the example of the Euro, according to experts Moody’s. The European currency was introduced for cashless treatment in 1999 and then became the backup into the basket of special drawing rights of the IMF. Its share in the structure of the world reserves against other currencies has declined significantly over the last decade. This is partly due to its predominantly regional rather than global reserve status for the reserves it is used in Europe and parts of Africa. The Euro will not be able to recover its share in the world reserves, yet will not play a large role in other markets, particularly in Asia and Latin America, or not improve its attractiveness as a strong and stable currency, confidence in Moody’s.

This in turn depends on the strength of institutions and mechanisms to reduce risks in the EU. The EU is still working on creating a Banking Union and strengthening its stabilization mechanisms. The result of this process could increase the stability of Europe to economic shocks. As soon as the institutions supporting the Euro will be stronger demand for Euro as reserve currency should rise, predicts Moody’s.

The proportion of the yuan in global reserves is unlikely to increase in the short term, despite rising demand for the Chinese currency, experts say. Strengthening China’s relations with other countries will lead to greater use of the yuan as a means of payment. However, it is unlikely that this will cause a quick change in the structure of world reserves, as partners of China for the project “One belt and one road” do not have significant foreign exchange reserves and play a modest role in global trade, says the review. The importance of the yuan will increase faster if the leading Central banks such as the ECB, the Bank of Japan and Bank of England decide to significantly increase its share of the Chinese currency in their reserves, analysts say.

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