Dumping the Dollar

Top officials from China used strong language as to enforce the fact that they would want to see a new world reserve currency replacing the dollar. They said: "The global financial crisis reveals flaws in the international monetary system". "An international reserve currency should not be tied to the interests and economic conditions of any one country". People`s Bank of China Governor Zhou Xiaochuan suggested the IMF`s Special Drawing Rights, a currency basket comprising dollars, euros, sterling and yen, could serve as a super-sovereign reserve currency, saying it would not be easily influenced by the policies of individual countries. Some analysts say the move demonstrates China`s growing discontent with American dominance of the world economy. Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions. IMF managing director Dominique Strauss-Kahn said that talks on a new world reserve currency to replace the US dollar were "legitimate" and could take place "in the coming months."

One solution China is offering to reduce currency-value uncertainty is expanding the use of an instrument called Special Drawing Rights (SDRs). These were devised by the International Monetary Fund about half a century ago. They are based on a basket of currencies. Widespread use of SDRs never really caught on because the system continued to work fairly well with the greenback at the top of the heap. But now, with greater financial sector regulation in the air and an overhaul of world financial markets likely upcoming, there are starting to be some calls for a re-examination of currency markets as well.

We have had a long history of reserve currencies which reflects an interesting fact that the position of a country as a super power of the world (whose currency acts as a reserve currency) tends to rotate in a natural cycle of around 100 years.

Will History repeat itself?

Source: Content provided by Hongkong Monetary Authority
*U.S Dollar still remains the world reserve currency. No. of years calculated upto 2009

The above table indicates that we may be near or just few years away from the climax. Historically, as other currencies have dominated as a reserve currency for a cycle of nearly 100 years, it could be true for the dollar too.

SDR is a combination of the U.S Dollar, Yen, Euro, and the British Pound i.e currencies of different nations.

As we are all aware, each of the economies whose currencies are mentioned above are going through equally difficult times as the United States. Then, how their combination would be different from the U.S dollar. It still is a paper bag of paper currencies which is just the problem we all suffer from.

There seems to be no practical solution.

With paper currencies and the power to print it at will, inflation is inevitable.

The only super rescuer out of this financial mess and the coming inflation is Gold.