October 16, 2009

• <Treasury Department on status of US Dollar as global reserve currency>

  

  “Most of these factors suggest that the dollar and the euro would account for equal shares of global reserves. The size of the euro area economy is only slightly smaller than the U.S. economy. The economy of the euro area is only slightly smaller than the U.S. economy. “

  I don’t understand why, in this report by Treasury Department of US, they have two similar statements in the same paragraph.

  ————–

  Anyway, according to Treasury Department, there are 6 criteria for a reserve currencies

  1. The size of the domestic economy

  2. The importance of the economy in international trade
  3. The size, depth, and openness of financial markets
  4. The convertibility of the currency
  5. The use of the currency as a currency peg, and
  6. Domestic macroeconomic policies

  My take away for Renminbi : Mainland’s domestic economy is big (2nd after US, but the overall size is only 25% of US), it’s important in international trade and fair domestic macroeconomic policies

  But financial markets remained shallow, basically RMB is not freely convertible, no currency is pegged to it (HKD and Macao $ will be amongst the first, but in decade time)

  So RMB as the reserve currency? We need pull and push factors. RMB has to be freely convertible and its financial markets have to be well developed. Some currencies will have to link to it. On the push-side, we have to wait until another huge financial crisis in US. Recall that Pound did not lose its global reserve currency status until the 2 World Wars.

  • 3:52 am
  • Leave a comment