Is The Dollar Dead?

The financial crisis sparked a great deal of doubt about the United States' prominence as the reigning financial superpower. Those worries partially inspired an article today in the Wall Street Journal. It explains that some very prominent world leaders would like to see the dollar dethroned as the dominant reserve currency for foreign nations. Could this really change?

Of course it could change, especially if your time horizon to see that change is long enough. The U.S. may remain the a dominant superpower indefinitely, but other very important nations, such as China, are beginning to challenge U.S. prominence in business and finance. Still, the stability that the U.S. dollar provides might not be matched by other currencies for some time. As we just saw, even in a time of great economic turmoil, the U.S. dollar seems the safest currency out there.

But there is a very interesting alternative that the WSJ article talks about using for a reserve currency instead:

The approach favored by China's Mr. Zhou is to rely more heavily on something called the SDR, a "special drawing right" created by the International Monetary Fund. The SDR is a synthetic currency, comprised of a basket of the dollar, euro, yen and the pound, and contributed to central-bank reserves.

The SDR remains heavily tied to the dollar. But since the end of the gold standard, it is the closest the world's gotten to an international currency. Just last week, the IMF released its largest supply of SDRs ever, $250 billion dispersed into central banks globally. And though it has been around for 40 years, the SDR remains largely irrelevant.

I wouldn't be surprised if, one day, the SDR or something like it became far more relevant. It does seem a logical choice to hedge your bets on any one nation having a financial crisis weakening their currency -- even if that nation is the relatively stable U.S. I'm just not convinced a synthetic currency like this will gain popularity in the near-term. Neither is this Chinese professor, who the WSJ quotes:

All of this is wishful thinking in the eyes of Michael Pettis, a professor at Peking University's Guanghua School of Management. He sees the dollar only growing more entrenched in the years ahead. To make the Chinese yuan a reserve currency would require that China run trade deficits -- a highly unlikely outcome. "My guess is that three or four years from now, the whole discussion will disappear," he says.

That's exactly right. As long as the U.S. remains a major global consumer, dollars matter. Since I would not expect Americans to change their buying habits anytime soon, the dollar will likely also remain the most important global reserve currency. At least for now.