Dollar 'losing grip as world's reserve currency'

As China and emerging markets drastically increase their share of global foreign exchange reserves and the US economy's slice of global growth shrinks, the US appears to be systematically losing its absolute dominance as the reserve currency of the world.

According to Stanlib's chief economist, Kevin Lings, the US's loss of importance in the global economy is partly to blame, but it also due to a broader recognition of the structural impediments facing the US economy.

The US economy has slid from a peak of 32.2% of world GDP in 2001 to 23.7% currently.

At the end of June, the International Monetary Fund (IMF) released its update on the currency composition of official foreign exchange reserves held at 138 central banks in both developed and emerging economies. The total value of the world's official foreign exchange reserves amounted to a massive US$9.694 trillion at the end of the first quarter of 2011, which is a record level and US$1.4 trillion above the level that prevailed a year ago.

China's share of those reserves is now in excess of 30%, and rising.

“Amazingly, in the year 2000, China's share was less than 10%,” said Lings on Tuesday.

SA's gross foreign exchange reserves amount to about US$50 billion, which is equivalent to about 0.5% of the world's official reserves.

Most of the world's official reserves are now in the hands of emerging economies - at 67.4% of the total, or US$6.53 trillion, at the end of first-quarter 2011.

“The remarkable thing is the growth in these reserves. Since the beginning of 2000, the official reserves of emerging economies have grown by a total of US$5.87 trillion, or 890%. This has been driven by a massive increase in investment and trade flows with emerging economies over the past 10 years, especially with China,” said Lings.

Emerging economies comprise more than 30% of world GDP, well up from less than 20% as recently as 1999.

“However, one cannot assume that this loss of dominance by the US dollar will continue on a perpetual basis. This is partly because the dollar continues to play an overriding role in commercial activity around the world, but also because there is still no clear and obvious successor to the dollar,” concluded Lings. - I-Net Bridge