The world's central banks are starting to get serious about diversification, and it all started when the Federal Reserve started monetizing debt.
(Bloomberg) -- Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.
Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.
In a new op-ed Joseph Stiglitz argues that due to the national debt (projected to be $9.05 trillion over the next 10 years), America should get on the we need a new reserve currency beyond the dollar bus. Kind of a if you can't beat 'em, join 'em message. (see China and the Dollar for details on the Chinese game of chicken while pushing for a new reserve currency).
Our budget deficit, as well as the Federal Reserve's ballooning lending programs and other financial obligations, will accelerate a process already well underway -- a changing role for the U.S. dollar in the global economy.
This article says it all. Our financial geniuses think they are so smart, but we are way behind the curve. All of those foreigners who go to Harvard, MIT, Berkeley, Stanford and all the other elite institutions here pay attention. They are able to assimilate not only how the US thinks, but they are very good at formulating Long Term National Strategies maximizing their positions. On the other hand, our best and brightest just seem to be learning how to get rich in the short term. Unfortunately, the end game indicates that we will all be Chinese one day.
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.
Zhou's speech shows that the issue is a pressing one for China, whose top officials regularly bemoan the volatility of the dollar and what they see as U.S. economic mismanagement.
Creating a new, widely accepted reserve currency may take a long time, Zhou acknowledged. It would be a "bold initiative that requires extraordinary political vision and courage".
SDR ADVANTAGES
Allocating more SDRs would give the IMF more resources and help it address imbalances in power within the fund, where big emerging economies like China muster a fraction of the votes cast by Europe and by the United States, which wields a veto.
As well as a further allocation of SDRs, Zhou proposed a series of steps to broaden the unit's use so it can evolve into a reserve currency:
Gulf-based analysts point out that most of the currencies of the GCC are undervalued against the dollar, based on their current-account balances, inflation and costs of goods and services. The UAE dirham was undervalued by 10-15 per cent and the Saudi riyal by 25-30 per cent, according to a report by Deutsche Bank AG.
"The dollar peg prevents nominal appreciation. Since the dollar itself has been falling, the result is rising domestic inflation. Some Gulf economies now have inflation rates of around 10 per cent," analysts said. Markets piled pressure on Gulf currencies last year as speculation mounted that more GCC countries would follow Kuwait and abandon links to the weak dollar partly to curb imported inflation.
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