Could We Be About to Usher in a New Reserve Currency?

Monday September 5, 2011

Most people are aware that the US dollar is currently the world’s largest reserve currency. This is the currency that most banks have in the largest quantities, held as reserves in many countries.

But things change and the foremost reserve currency has also changed over the years. The best example of this comes by way of the British pound. Back in the 19th century it was the biggest reserve currency known throughout the world. But it was eventually replaced by the US dollar as the situation changed and the dollar proved to be the stronger currency to go with.

Now though it would appear as if times are changing once again. The US dollar has gone through some very tough times recently as a result of the downgrading of America’s credit rating. Even as early as February 2011 there were reports that some people were discussing the idea of sending out the US dollar in favour of a new reserve currency. Now it would seem that such talk is becoming more prevalent.

The International Monetary Fund speculated back in February that the replacement of the dollar could be a good thing for the world economy. Needless to say things are still very unstable at the moment, leading to the possibility of prolonged pain for many countries trying to sort out their debts. In March the news continued of the dollar being less popular as a reserve currency. It could be that the wheels have already been set in motion for a changing of the guard. It might just be that we don’t know who or what the replacement will be just yet.

So which is the second placed candidate looking to step into the dollar’s shoes? It is none other than the Euro, but this doesn’t look to be a stable candidate because its own existence is being continually called into question. The British pound comes in a lowly third place, quite some way after the other two currencies, so this would look to be an unlikely prospect as well.

In truth we might need a change at the top. But never has the status of possible replacements looked so poor. It will be intriguing to see where this goes and how long it takes before the dollar has to say goodbye to its reserve status. We shall be watching.