Is There a Viable Alternative to the Dollar as the Reserve Currency?

Within the recent retracement of the U.S. currency there has been endless speculation about the future role of the dollar as the world’s reserve currency. There has even been conjecture that the dollar will no longer exist at some point in the near future but the case made for the vulnerability of the dollar falls short when it comes to naming alternatives. Words: 631

In further edited excerpts from the original article* Bryan Rich (www.moneyandmarkets.com) goes on to say:

If you believe inflation will be a problem at some point in the future, the purchasing power of the dollar will fall but against what other major currencies? If the Fed and other central banks around the world fail to remove the emergency stimulus before those measures translate into inflation, then ALL currencies will fall in value relative to hard, tangible assets like gold, real estate and other commodities … even financial assets like stocks and bonds. That’s global inflation.

Let’s take a look at three of the often-suggested dollar alternatives:

Dollar Alternative #1: The Japanese yen
The economic problems of the U.S. pale in comparison to those of Japan and that’s why the demand for gold, as a hard currency, has been rising. Japan has one of the highest debt loads in the world, approaching nearly 200 percent of GDP, which is more than twice what is projected in the U.S. Japan‘s economy has also suffered the sharpest contraction of any major economy in 2009 and is expected, again, to underperform the U.S. economy in 2010.

Conclusion: If you don’t like the dollar for its fundamental economic challenges, you surely can’t like the yen.

Dollar Alternative #2: The British pound
The Brits are flooding their economy with billions of pounds. The UK economy is the most troubled and most volatile major, developed market economy. The money-printing program in the UK has been the most aggressive in the world. In fact, The Bank of England is still expanding its money printing program, as other major economies are winding down and while the UK central bank continues injecting billions of pounds into zombie banks, the economy continues contracting. At the same time, other major economies have technically emerged from recession.

Conclusion: This makes the British pound perhaps the least desirable currency for global investors.

Dollar Alternative #3: The euro
The Eurozone is expected to underperform the U.S. in 2010 and the interest rate outlook for the Eurozone, as projected this week by the Organization of Economic Cooperation and Development (OECD), is for rates to move from 1 percent to 2 percent by 2011. That’s lower, both on an absolute and on a rate-of-change basis, when compared to the United States. In the U.S., the OECD expects rates to normalize to 2.25 percent to 2.5 percent by 2011.

Conclusion: The Eurozone has weaker growth and lower interest rate prospects than the U.S. so the euro falls short of the dollar on both comparisons. Indeed, in terms of purchasing power parity, the dollar should be 26 percent stronger against the euro based on fundamentals. Clearly the dollar wins over the euro … the second most widely-held global currency.

In this era of globalization, economies around the world have proven to be highly correlated and highly interdependent so while the global economy is piecing together a tepid recovery, when looking for viable dollar alternatives among other major liquid currencies … there simply aren’t any.

*http://www.moneyandmarkets.com/weighing-the-dollar-alternatives-5-36521 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)

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