There’s a basic problem with the global financial system — it’s too focused on the U.S. dollar. A new report from Barclays suggests a different route — central banks could decide to hold fewer reserves altogether.
There’s a basic problem with the global financial system — it’s too focused on the U.S. dollar. Yes, the U.S. is the world’s largest economy, but the dollar represents 60% of global foreign exchange reserves and 40% of international trade, despite U.S. GDP representing just a fifth of world output and being a counterparty for roughly 10% of global trade.
That’s led to talk that perhaps some other currency, or currencies, could replace the dollar’s role as the reserve currency, or maybe gold or even bitcoin could do the trick, but there’s problems with each of those alternatives, from convertibility in the case of China, to cyclicality in the case of the euro. The fact the U.S. dollar DXY, +0.45% is trading around a 20-year high suggests the market doesn’t treat any rival as a particularly compelling alternative.
It wouldn’t be an easy shift. After emerging market crises during the 1980s and 1990s, countries built up foreign reserves to safeguard their independence, so as not to require International Monetary Fund rescues with inevitable strings attached. The leading foreign-reserve holders have built up war chests that are three times the roughly three to four months worth of imports that the IMF recommends.
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