The U.S dollar is shrinking as a percentage of the world’s currency supply, raising concerns that the greenback is about to see its long run as the world’s premier denomination come to an end.
When compared to its peers, the dollar has drifted to a 15-year low, according to the International Monetary Fund, indicating that more countries are willing to use other currencies to do business.
While the American currency still reigns supreme — it constitutes $3.72 trillion, or 62 percent, of the $6 trillion in allocated foreign exchange holdings by the world’s central banks — the Japanese yen, Swiss franc and what the IMF classifies as “other currencies” such as the Chinese yuan are gaining.
“Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown,” Dick Bove, vice president of equity research at Rafferty Capital Markets, said in a note. “But it will be, and this defrocking may occur in as short a period as five to 10 years.”
Bove uses several metrics to make his point, focusing on the dollar as a percentage of total world money supply.That total has plunged from nearly 90 percent in 1952 to closer to 15 percent now. He also notes that the Chinese yuan, the yen and the euro each have a greater share of that total.
“To the degree that China succeeds in increasing its market share of the world’s currency market, the United States is the loser,” Bove said. “For years, I have been arguing that the move of the Chinese makes perfect sense from their point-of-view but no sense for the Americans.”
For a country with a budget deficit in excess of $1 trillion a year, the consequences of losing standing as the world’s reserve currency would be dire.
“If the dollar loses status as the world’s most reliable currency the United States will lose the right to print money to pay its debt. It will be forced to pay this debt,” Bove said. “The ratings agencies are already arguing that the government’s debt may be too highly rated. Plus, the United States Congress, in both its houses, as well as the president are demonstrating a total lack of fiscal credibility.”
Read more at CNBC.