FT’s Plender: Dollar Firmly Ensconced as World’s Reserve Currency

Thursday, 14 Mar 2013 08:23 AM

By Dan Weil

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The dollar isn’t about to lose its role as the world’s primary reserve currency anytime soon, despite predictions to the contrary, says Financial Times columnist John Plender.

First, “the short-term fiscal problems of the U.S. are tending to distract attention from the economic fundamentals,” he writes. “February’s better-than-expected employment figures underlined once again the relative strength of the U.S. cyclical position.”

Non-farm payrolls rose 236,000 last month, and unemployment dipped to a four-year low of 7.7 percent.

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Even the budget deficit is falling as a percentage of gross domestic product (GDP), Plender notes. If fiscal policy doesn’t change, the budget deficit-GDP ratio will shrink in 2013 for the fourth year in a row, to 5.3 percent, the Congressional Budget Office estimates.

While the consensus calls for economic growth of only about 2 percent this year, “compare and contrast with zero growth or worse for Europe,” Plender writes.

“The structural side of the economy is also in far better shape than that of Europe or Japan in terms of the flexibility of markets, capacity for innovation and the potential now for energy independence.”

As for China, “the Chinese policy makers I have talked to over the past year see reserve currency status for the renminbi as a very long-term project,” Plender says.

“The U.S., with all the advantages of deep financial markets, strong property rights and incumbency, is thus set to remain top dog in the reserve currency set-up,” he writes.
“And the dollar may be set for renewed strength.”

Star bank analyst Dick Bove of Rafferty Capital Markets begs to differ about the dollar’s future.

“Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown,” he writes in a commentary obtained by CNBC. “But it will be, and this defrocking may occur in as short a period as five to 10 years.”

The dollar’s share of global money supply has plunged from nearly 90 percent in 1952 to approximately 15 percent now, he says, with the Chinese yuan, the yen and the euro each having a greater share of the total.

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