Investors are undoubtedly frustrated by the games in Washington, but the dollar's king currency status remains in tact because the world knows there are no alternatives.
When U.S. lawmakers seem on the verge of creating another crisis, there's an eruption of chatter about the fate of the dollar's status as the world's reserve currency, coupled with talk about investors possibly fleeing the Treasury market.
In the end, the world does not abandon the dollar or retreat from U.S. Treasurys.
“There's no other reserve currency. There's nothing remotely close,” Jason DeSena Trennert, chief investment strategist at Strategas, told CNN Money
. “It's not a divine right, but the U.S. is basically winning by default,” he explained.
“If this keeps happening, investors will get fed up, but you can't find an alternative overnight,” George Goncalves, head of U.S. rates strategy at Nomura, told CNN Money.
“It could take 10 to 20 years to create one. A lot of money has to change hands to make that happen,” he said.
In the investment world, risk and reward is supposed to have an inverse relationship. The more danger investors face, the more they should demand for their bets.
The U.S.' short-term borrowing cost did spike during this latest debacle. This was widely considered an indication investors were concerned about late payments, not non-payment.
But as the BBC
's business editor, Robert Peston, points out, “the funny thing” is that even as the clock was ticking down, there was no significant rise in America's long-term borrowing costs. In fact the price of 10-year and 30-year bonds rose. As the U.S. teetered on the brink of crisis, its borrowing costs were cheaper than a few months earlier.
Some put forth ideas that the Chinese or European currencies could steal the dollar's crown. China even joined in on the tongue-lashing of the U.S., calling for a move toward a “de-Americanized" world.
But Goncalves says China is not in any position to propose replacing the dollar with its yuan.
“China can talk tough, but they aren't prepared to liberalize their currency,” he told CNN Money. “That would create risks they can't control because China's financial system is not that developed.”
Peston agrees, saying China's currency “is a million miles from being a liquid, easy-to-trade currency” and “a long way from offering a safe haven alternative to the dollar.”
And “the idea of the euro becoming the world's reserve currency would be regarded as laughable by most investors, at a time when few of them are convinced that the euro is forever ...” he wrote.
The dollar is “the currency that oils the wheels of global capitalism” and “for now, the dollar is the only reserve currency we have,” Peston acknowledged.
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