The subject of debate nowadays is the potential replacement of the dollar as the global reserve currency. Global currency reserve is a part of the foreign exchange reserves in which central banks have the authority.
However, in reality, there are a few currencies that have influenced these reserves. These currencies are being managed in place of the government by the central banks who have a good history in an excellent meeting of their demands and obligations.
Swiss franc., The Australian dollar, Japanese yen, Euro, U.S. dollar, Chinese renminbi or yuan, British pound, and Canadian dollar are the currencies recognized by the International Monetary Fund or IMF.
In the global foreign exchange reserves, the U. S. dollar is the widely-used currency. It denominated 6o percent in the foreign exchange reserves, which is why it is recognized as the global reserve currency.
Euro, on the other hand, is the second preferred international currency reserve, which comprises a total amount of $2.2 trillion of global foreign exchange reserves. And half of the 20% left accounted for yen and sterling.
The multi-polar system
Although dollar-denominated worldwide, countries still have the tendencies to hold the dominant currency within their proximity. In other words, European countries from the outside of their zone always lean on keeping the Euro and the same with the Asian countries holding the yen.
Based on economists, this can lead to the development of a multi-polar system in which the Americas’ main reserve currency is the dollar, and for Europe, it would be Euro.
If this happens, then the value for dollars and the dollar-dominated assets will go down while euros and yuan or renminbi, together with their safe assets, will significantly increase. If this kind of situation arises, the dollar exchange rate will now be lessened, and the interest for the securities of dollar-denominated will rise, primarily on the debt of U. S. government.
Hindrance to a multi-polar system
China doesn’t possess a tradable safe asset that is renminbi-denominated. And if there’s no obtainable suitable safe asset, then the currency will hold no value or interest. Also, it is believed that the portion of renminbi to global foreign exchange reserves may continuously be a low rate, and countries in Asia will continue to depend on the yen and dollar more than the renminbi.
The Euro is the serious contender of the dollar for being the global reserve currency. Some of the oil producers in the Middle East can begin accounting in euros made, resulting in euros being appealing. However, some analysts are now emerging again that euros can replace the dollar as the currency is mainly used in the trading of oil.
They said that the Euro has inadequate safe assets if it replaces the dollar as the primary currency. The reason for this is the European countries’ debt is not acknowledged as safe anymore.
Due to these obstacles, the global currency reserve remains the dollar and is not likely to be replaced soon, perhaps farther in the succeeding years.