World Reserve Currency: The Possible Contenders

The world needs a reserve currency and, for the US$ to be displaced in that role there must be a viable contender to take its place. Let’s quickly review the possible contenders:

1. EURO – A strong regional currency in a region that rivals the US economically. However, that region has some economically very weak component countries and lacks sufficient political cohesion to support the world’s reserve currency.

2. YEN – The currency of a very strong nation experiencing significant economic problems. It is not even a regional currency.

3. RENMINBI - The currency of a very strong nation and economy. While this economy may become the world’s largest in the foreseeable future, its currency remains, and will probably remain, too much the tool of China’s government thus discouraging other nations from adopting it as the currency of international settlement.

4. GOLD – While there are certainly many who advocate the establishment of an international gold standard (or another international standard currency based on a basket of commodities, a basket of currencies, or a basket combining currencies and commodities) it is difficult to see sufficient international will or consensus for this to happen in foreseeable circumstances.

It is true that the role of the US$ as the world’s reserve currency has been reduced somewhat over time since the 1970s but the world needs one reserve currency, it is very difficult for the world to shift from one to another currency for this purpose and for such a shift to take place there at least needs to be a viable contender. This set of conditions is not now met.

- Bob Adamson:

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