News Column

China Banker: Dollar Remains No. 1 Reserve Currency

Feb 20 2013
Dollar

The U.S. dollar will remain the world's chief reserve currency for decades and likely increase in strength, a senior Chinese central banker wrote in a paper.

"The dollar's global dominance will continue," Jin Zhongxia, head of the research institute of the People's Bank of China, wrote in a personal commentary for the Official Monetary and Financial Institutions Forum, a London banking and financial-industry think tank.

His commentary can be found at tinyurl.com/Jin-Zhongxia.

Jin said the world was moving to a "1+4" global currency system.

"The dollar will continue to be the super reserve currency, supplemented by four smaller reserve currencies: the euro and the British pound in Europe, and the Japanese yen and the Chinese renminbi in Asia," he said.

The dollar's global dominance reflects "U.S. economic, financial and military power," Jin said, and the currency has resilience to economic shocks that other key currencies, such as the euro, don't have -- as demonstrated by the eurozone debt crisis.

"The debt crisis in the euro area has demonstrated the structural weakness of this currency," he said. "If we take into consideration that the euro partially relies on the dollar's payments infrastructure for its cross-border transactions, we can say that the euro is basically a very large regional reserve currency.

"But the sheer size of the euro area economy and financial market, together with its highly advanced science and technology, will maintain the euro as the second most important international currency, behind only the dollar, in the foreseeable future," Jin said.

Indeed, he said, the dollar has developed an informal "dollar zone" worldwide nexus as a globally traded safe-haven currency recognized as a reliable and stable store of value.

"The U.S. economy is not merely stronger than that of the euro area by itself. In addition, the U.S. economy also enjoys the existence of an unofficial dollar zone," he said.

"Those countries in the world that rely on the dollar for most of their international transactions and hold dollars as major international reserve asset all belong to the de facto dollar zone.

"Compared to the euro area, the dollar zone has much greater resilience to shocks. This is because the exchange rate between the dollar and the other currencies are mostly not fixed and can be adjusted when necessary," Jin wrote.

"The dollar zone looks much more loosely connected, but in reality it is more coherent than the euro area, despite the official commitment of the euro member states to that currency."


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Source: Copyright United Press International 2013


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