August 10, 2011
The U.S. Dollar Is Still the Top Choice
By AGNES T. CRANE and ANTONY CURRIE
It will take more than a debt downgrade and two years of ultra-low interest rates to knock the dollar from its perch as the world’s reserve currency. Despite multiple setbacks, the dollar remains the lingua franca of global commerce and the currency of choice for foreign central banks.
The Federal Reserve’s commitment to keep interest rates exceptionally low until mid-2013 is bound to start another storm of international protest, and with good reason. Low rates make dollars much less appealing to hold and drives investors to alternatives like the Swiss franc and the Japanese yen.
When combined with the decision by Standard & Poor’s to strip America of its AAA rating, the dollar should arguably be taking a bigger hit. The dollar index, which measures the dollar’s value against several other currencies, is at a depressed 74.7, but still well above the 71.3 it hit in early 2008.
A big reason is that a strong dollar remains in the world’s best interest. Even though it has lost more than a third of its value in the last decade, global savers have filled their central bank mattresses with the stuff. According to the International Monetary Fund, 61 percent of the world’s $5.3 trillion allocated currency reserves are in dollars, little changed from the previous two years. New purchases in the first quarter overwhelmingly favored the dollar, as some central banks bought it to check the appreciation of their own currencies.
Reserve currency reigns do not end overnight. The previous champ, sterling, ceded its title over a period of decades. This time around, there is still no other currency that could take the dollar’s place. The euro, once the leading contender, is under siege, while the Chinese renminbi is still pegged to the dollar. Plans to create a reserve currency basket have not gained much traction.