The Challenges of the Dollar Being an Intenational Reserve and Investment Currency

1626 WordsJan 29, 20187 Pages
The U.S. dollar index has exhibited a clear long-term downward trend since 2002. This is a cause for concern among emerging markets because a large proportion of their foreign exchange reserves is held in dollar denominated assets. The dollar accounts for 62 percent of allocated foreign exchange reserves around the world and for 58 percent of the allocated reserves of emerging and developing economies . Most central banks would incur considerable losses on their investments if the depreciation of the dollar continues in the future. Even if the depreciation of the dollar does not impact the attractiveness of U.S. securities now, it poses a significant challenge to the “exorbitant privilege” of the dollar as an international reserve and investment currency. In the aftermath of the financial crisis and due to fears that the dollar might lose its predominant status, the search for alternative currencies has intensified. Although it is improbable that a shift from the dollar will happen in the near future, private investors and central bankers have highlighted the need for portfolio diversification towards alternative currencies. In the first quarter of 2013, about 94 percent of allocated foreign exchange reserves comprised of holdings in the 5 traditional reserve currencies: dollar, euro, pound sterling, Swiss francs, and Japanese yen. On the other hand, other currencies accounted for just 6 percent of allocated foreign exchange reserves . Besides the emerging market currencies

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