Though the US dollar continues to reign as the foreign reserve currency of choice, a new International Monetary Fund analysis shows that the currency has slumped to a 15-year low, heightening concerns that it may lose that status.
While the dollar currently constitutes 62 percent of the $6 trillion in foreign holdings by the world’s central banks, when a historical view is taken into account, Dick Bove, vice president of equity research at Rafferty Capital Markets says the dollar’s actual percentage of total money supply worldwide has gone from 90 percent in 1952 to about 15 percent today.
Bove, like many other analysts, believes that the rise of the Chinese currency, the yuan, is at the expense of the US dollar’s dominance as a safe haven.
"Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown," says Dick Bove.
"But it will be, and this defrocking may occur in as short a period as five to 10 years," he tells CNBC.
The repercussions of the dollar’s decline as the foreign currency holding of choice would be more than a symbolic hit to America’s economic standing. With a budget deficit exceeding $1 trillion per year, if the dollar were to decline against other currencies the US would find itself in the uncomfortable position of having to pay back this debt.
If China is indeed embarking on a project to establish its currency as more market-oriented, then its swelling trade with nearby countries such as New Zealand and Australia, which agreed last month to direct convertibility with the yuan, could well continue to undermine the greenback.
Beyond simply removing the American currency from trade, direct convertibility can also make Chinese government bonds more attractive as foreign-exchange assets. Australia, for one, says it plans to invest up to 5% of its total foreign-currency reserves to Chinese government bonds, while New Zealand’s Reserve Bank has thus far not made any announcements either way.
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