The 2008 recession has turned the global currency picture upside down. The impact of the slowdown has been felt harder on the advanced economies such as the US, UK and Europe, leading to substantial drain in their currency strength and prospects.
Prior to the great recession, economists had pegged Euro as the next global reserve currency which could give tough competition to the US dollar for its decades of dominance. However, the recent spate of Greece-led turbulence in the Euro zone had almost brought the euro on the brink of breakdown, if not for the $1 trillion rescue package announced by the EU-IMF bailout deal.
With both the dollar and the euro looking weak now, the balance tilts towards the currencies led by emerging market economies such as China’s yuan, India’s rupee and Russia’s rouble. However, the above statement is far away from concluding them as a reserve currency.
China’s yuan is no divine. China has humungous amount of reserves denominated in dollar terms which renders its fortunes susceptible to the fluctuations of the US dollar and store of value in it. The world needs a global currency which does not rely on the US dollars as the single major reserve currency.
Reports indicate that the pace of recovery in the US and Europe is unlikely to witness a sharp bounce back in the near term. In fact, some analysts are as well predicting a double-dip recession in the US. With both the US and Europe still under the wraps of recession, the global GDP is unlikely to witness a fast-paced growth.
According to the IMF data, the US dollar’s share of reserves dropped from more than 62% in the previous quarter to a 10-year low of 61.5%. Meanwhile, the euro’s share fell from 27.3 per cent to 27.2 per cent. In fact, even China is diversifying away from dollar at $3.7 trillion unallocated reserves.
In fact, the euro and the dollar are losing their sheen off late. This view can be supported by the fact that their share in the global foreign exchange reserves have decreased in the Q1-2010.
Sparkling among the lot of BRIC economies is Indian currency – The Rupee.
The Indian economy has emerged relatively unscathed from the global slowdown and leading the curve. In fact, India leads the charts in terms of inbound inflows by the way of FII and Foreign Direct Investment (FDI), being amongst the top out-performers on the global podium.
Mirroring this trend, the Indian Rupee has appreciated sharply from the lows of Rs.50 per dollar during recession to the highs of Rs.45 more recently, currently around Rs.47 against a dollar. However, it cannot be pegged as a global reserve currency as Indian financial markets are highly susceptible to the volatility in the global flow of funds, as witnessed during the recent recession.
Economists are of the view that the new global reserve currency should not be based upon a basket of currencies, but the special drawing rights (SDRs) which would be controlled by IMF.
More over, even Russia wants rouble to be one of the world’s reserve currencies. Russia has renewed its push to reduce dollar’s dominance. In fact, the Russian president Dmitry Medvedev opines that the world may need as many as six currency reserves rather than relying solely on the fundamentals of any particular currency as a global reserve.
Any guesses…which will be the next global reserve currency in future?