Originally posted Friday, October 12, 2012


Khalil Hanware, on the news staff of ArabNews.com, from Saudi Arabia, recently published a rigorous and impeccable report on the question of “Is dollar still the reserve currency of choice?”  The conclusion is, yes, the data and analysis impeccable.

Hanware’s Pulitzer-worthy reporting is important in its entirely.  Here are a few of the most significant observations:

JEDDAH: The US dollar will unlikely to lose its status as the main reserve currency in the near future despite the current challenges facing the US economy, regional economists said yesterday.

According to the International Monetary Fund data, the dollar’s share of known global reserves held by central banks slipped in the year’s second quarter.
The dollar’s share of the roughly $5.8 trillion of known reserves was 61.9 percent in the second quarter compared with 62.1 percent during the first three months of the year, Reuters reported.

Fahad Alturki, senior economist at the Riyadh-based Jadwa Investment, said: “It is less likely that the dollar will lose its status as the main reserve currency in the near future despite the current challenges facing the US economy. Of course challenges such as persistent current account deficits and growing foreign public debt are expected to dent the dollar’s status as a reserve currency in the short-term but it will not eliminate it mainly due to lack of an attractive alternative that would match the long-term strength, stability, depth and liquidity of the dollar.”

When asked whether the dollar is still the reserve currency of choice, Jarmo T. Kotilaine, a regional economist, said: “I think we can safely say that it is. Its standing may not be quite as unequivocal or uncontested as before but the latest data highlights the reality that there are no real alternatives for the dollar with the partial exception of the euro.”

Total global central bank holdings, including currencies not specified, rose to a record of more than $ 10.5 trillion, Reuters said.

Despite the euro zone debt crisis, the euro’s share of global reserves increased to 25 percent from 24.9 percent in the first quarter. The central banks’ allocation to euros increased by  $45.5 billion in the second quarter, the IMF data showed.

“The US dollar is still the “reserve currency of choice” in spite of slight dip of its share. As for the euro and despite its debt crisis, it is still maintaining its share in global ranking in reserves. Having said that, emerging markets have slowed their reliance on the euro as a reserve currency,” according to Basil Al-Ghalayini, CEO of BMG Financial Group.

But Kotilaine said: “I don’t think that the data suggests that the share of other currencies is on the rise in global reserves, even on the margin. “The euro has naturally been tested by the euro-zone crisis, although even its resilience highlights the relative absence of alternatives. The reality is that there are precious few globally traded, freely floating currencies supported by deep financial markets,” he added.

According to Kotilaine, the euro is clearly the only real alternative to the dollar, even if it is lagging far behind. The euro-zone crisis will complicate the euro’s emergence as an equal alternative. Indeed the current position could even be further eroded should the situation in the euro-zone further deteriorate. “But the challenge for reserve managers around the world is that they are now left allocating the lion’s share of their assets between the two challenged currencies with no sign of more credible alternatives to go to. The global currency system is being tested as never before but this aspect of its foundations stands firm,” Kotilaine said.

Overlooked by his sources, gold is “an attractive alternative that would match the long-term strength, stability, depth and liquidity of the dollar.”  The conclusion presented by Mr. Hanware — limited, by convention, to replacing the dollar with another currency — in no way contradicts the proposal to retire all national currencies — including the dollar — from reserve asset duty, replacing them with gold.  The case for this is  meticulously argued by Lehrman Institute founder and chairman Lewis E. Lehrman in The True Gold Standard — A Monetary Reform Plan without Official Reserve Currencies (Second Edition — Newly Revised and Enlarged) (Hardcover). 

Then French Finance Minister Valerie Giscard d’Estaing — probably drawing directly on the wisdom of French monetary statesman Jacques Rueff —  referred to the reserve currency status of the dollar as an “exorbitant privilege.”  Rueff himself observed, in The Monetary Sins of the West (The Macmillan Company, 1972, 1971, pp. 23-24):

[T]he gold-exchange standard brought about an immense revolution and produced the secret of a deficit without tears. It allowed the countries in possession of a currency benefiting from international prestige to give without taking, to lend without borrowing, and to acquire without paying.  The discovery of this secret profoundly modified the psychology of nations. It allowed countries lucky enough to have a boomerang currency to disregard the internal consequences that would have resulted from a balance-of-payments deficit under the gold standard.

The problems arising from the dollar’s status as a “boomerang” currency are well documented.  The protests by international monetary and financial authorities are well grounded.  Of course the problems associated with official reserve currencies cannot be addressed by replacing the dollar with other national currencies, which merely displaces, rather than resolves, the dilemma.  These problems can be resolved, however, and a neutral, equitable, and prosperity-inducing solution implemented, by replacing currencies with gold as the final official reserve in the international banking system.  To do so is entirely practical.  How to do so is articulated meticulously in Lehrman’s The True Gold Standard.