July 03, 2012
Emerging Reserve Currencies?
From the abstract to "A Note on Reserve Currencies with Special Reference to the G-20 Countries"
It is most likely that the current reserve currencies will retain their status in the near future, given the persistence in the composition of reserve holdings.
However, since we do not have complete data on the switchovers in lead reserve currencies, a great deal of uncertainty attends any forecasts. Hence, it is possible that new reserve currencies might appear with greater rapidity than anticipated. Of the candidates for new reserve currencies among the major emerging economies, the renminbi (RMB) is the most plausible. However, even under optimistic assumptions regarding economic growth and financial development, RMB status as a major reserve currency is some time off. A role for regional reserve currency status in the near future is much more likely. The advent of a multi-reserve currency world is unlikely to have negative consequences for global financial stability (and might be stability-enhancing). However, achieving the prerequisites for reserve currency status will force sacrifices in terms of policy autonomy. In addition, reserve currency status might reduce international competitiveness for individual countries, as higher currency demand appreciates their currencies.
Some insight regarding the rise of new reserve currencies (that do not supplant the lead reserve currency) can be gleaned from the experience of the Germany-UK switch.
Figure 4: (from Chinn, 2012) Five year moving average of log ratio of German to UK GDP (at current exchange rates), and differential estimated currency shares of reserves of all central banks, year-end, 1955-1980. Source: IMF, International Financial Statistics; IMF, Annual Reports, Chinn and Frankel (2008).
Figure 4 indicates that economic size does not directly determine reserve currency importance, although it does have an impact, with a lag.
The complete note is here.
Posted by Menzie Chinn at July 3, 2012 08:09 AMdigg this | reddit
With the rise of bilateral trade agreements and currency swap deals do you think new reserve currency will happen? A regional reserve currency is much more likely in my non-professional opinion.
Posted by: Dan49erfan at July 3, 2012 10:11 AM
"On March 24, 2009, Zhou gave a speech entitled Reform the International Monetary System, in which he argued that the ongoing financial crisis was made more severe by inherent weaknesses of the current international monetary system and called for a gradual move towards using IMF special drawing rights (SDRs) as a centrally managed global reserve currency. He argued that this would address the inadequacies of using a national currency as a global reserve currency, particularly the Triffin dilemma—the dilemma faced by issuing countries in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency. Zhou explained global currency diversification was needed because an over-concentration of foreign assets denominated in the dollar may bring about undesired consequences. Zhou argued that it was regrettable that John Maynard Keynes's "farsighted" bancor proposal was not adopted at Bretton Woods in the 1940s." Wiki
In other words, the Chinese do not want, nor do they condone, a national reserve currency.
Posted by: Ray LaPan-Love at July 3, 2012 02:21 PM
"However, even under optimistic assumptions regarding economic growth and financial development, RMB status as a major reserve currency is some time off."
Couldn't "financial development" occur at a very rapid rate if China allowed their currency to become convertible? Why would they need more growth - they are already bigger than any other country supplying a reserve currency except the U.S. and the combined economies of the euro members.
Posted by: don at July 3, 2012 06:40 PM
“The advent of a multi‐reserve currency world is unlikely to have negative consequences for global financial stability (and might be stability‐enhancing)”
One may concur with the above preliminaries, and may differ on the degree of urgency when it comes to implementation.
It is worth reading COFER IMF tables as they underline the great inconsistency in the use of currencies denomination. Domestic funding needs are met by borrowing USD resulting in a currency mismatch, a monetary policy mismatch and eventually an interest rate mismatch and a large representation of unallocated reserves.
Not to discard as well the abuse made by few countries sheltering their domestic funding needs trough pegged or dirty float as a mean to avoid addressing their own autonomous monetary policies, Hong Kong is among them. Perverse effects may as well be recorded through the access and cost of borrowing in foreign currencies. Lately major transactions in oil and commodities related are often conducted through direct currencies swaps between the purchaser and the seller.
“Chinn and Frankel (2007, 2008) find that the key determinant of reserve holdings is the depth
of the financial market, which they proxy using foreign exchange turnover in the financial
Not so sure that depth has any other meaning than comparing a daily turn over 4 trillion USD in London against a lesser in NY. BIS statistics may show a disproportionate amount of currencies daily transactions, they have nothing to do with underlying commercial transactions or even supporting financial transactions. Should a Basle n be including a larger capital weighing on contra accounts the commercial world and financial world transactions would not be defaced.
Prices, bid and offer could be available within the same ranges. Through separate Econbrowser post,mention was made of the plaque of Faraday and the requirements of the electrodes.The accumulation does not add to the proof of an adequate and balanced foreign exchange world. COFER data testify for the attrition of claims on few international reserve currencies.
“ Financial development involves the creation of institutions that are able to funnel large
amounts of capital from savers to borrowers in an efficient manner. Empirical work suggests
that institutional development (e.g., rule of law, a low degree of corruption) as well as open
capital markets are important (Chinn and Ito, 2006). To the extent that the largest emerging
market countries with currencies that are candidates for reserve status have relatively closed and underdeveloped financial markets, the path forward is unclear”
China foreign currencies reserve composition includes a large share of FDI and foreign owned hot capital. The implications are straightforward, international markets believe their savings may be transformed in investments in China or China related markets. What better umpire is needed to qualify these markets until they do not.
“Over the medium term (the next decade), it seems unlikely that any of the emerging market
currencies will become key reserve currencies on the order of the British pound. Over the
longer term, if the dollar’s role is eroded (for instance, by China, as suggested by Prasad and Ye,
2012), then tighter constraints will be imposed on the US government’s ability to finance
budget deficits. Conventional wisdom holds that there can be only one dominant currency at a
time, given network externalities. In contrast, Eichengreen (2005) asserts that historically,
several currencies have shared a dominant role simultaneously”
A large portion of the hot capital is allocated to the bonds markets, a better review of the financial instruments is required, as derivatives and over hedged positions may drive havoc in a small foreign bonds markets. Before opening the financial markets,one may wish to review their potentially damaging consequences. There are merits in running a bond market in autarky.The BIS report P37 outlays the case of the UK where a large portion of the long term, more than 10 years Gilts is owned by the BOE,and this happens within a declining long term yield curve P37.
It is of interest to read:
BIS report 82nd Annual Report 1 April 2011– 31 March 2012.
Posted by: ppcm at July 4, 2012 04:51 AM