The “cold logic of the marketplace” drives demand for the dollar as world reserve currency, not merely some amicable agreement between nations, according to economist Barry Eichengreen of The University of California-Berkeley.
Despite worldwide consternation, there simply isn’t a currency ready to trounce the dollar’s reserve status, even if somehow we wanted to change the system.
Why the Euro remains a pipe dream:
USA Today: But for all its attractions, the euro lacks some essential attributes. Although the European Union has a central bank, comparable to the Federal Reserve, there is no European treasury. Instead, there are 27 European treasuries. Investors can’t easily track or influence fiscal policy on the continent.
The dollar is also buoyed by the existence of a massive government bond market. There’s roughly $4 trillion worth of U.S. Treasuries floating around, and almost $100 billion changes hands each day, according to investment management firm Pimco. Trading that’s carried on almost 24 hours a day, rolling east to west from Tokyo to London to New York, makes it easy to move into and out of dollar positions in a hurry.
Europe, by contrast, has no analogue to the U.S. Treasury market. Instead there is a fragmented scene with individual sovereign debt from Germany, Italy, France and other EU members. No individual market enjoys anything like Treasuries’ liquidity and size.
And why the Yuan is nowhere close:
Today, the yuan isn’t freely convertible into other currencies, and there are strict limits on the cross-border movement of the Chinese currency. Chinese officials publicly have committed themselves to freeing the yuan to float alongside the dollar, euro, yen and other major currencies. That change, however, won’t happen overnight.
Overnight is an understatement here. Achieving credibility as a freely floating currency, after being pegged for so long, will take a very long time. It’s 10 times worse when a huge investor has to worry about one day the Chinese suddenly waking up and saying “Mmm, no the yuan won’t float anymore, it will be worth X dollars” than to worry about the dollar’s long-term depreciation.
Thus the Euro is the only real contender in the foreseeable future, yet as mentioned above it still has a long way to go, and may require serious reform, before it match the dollar.
Until then, the world will be forced by necessity, not some sort of political charity to the U.S. or whomever, to use the dollar as its reserve currency.
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