Forget China’s yuan: America’s mighty dollar still reigns

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by John Cassidy,

from Fortune Magazine,

About a decade ago I asked a (very) senior economic policymaker what he worried about in private. The dollar, he replied. If the U.S. didn’t deal with its spiraling deficits, foreign investors would eventually lose confidence in the greenback, and all sorts of nasty things would ensue: a financial crisis, a big rise in interest rates, a recession, and a lasting blow to American living standards. Well, we got the financial crisis and the recession, but the dollar has done fine. If anything, the past few years have seen a strengthening in the dollar’s role as the global reserve currency. Talk of the renminbi, or even Bitcoin, taking its place is just talk. During the recent selloff in emerging markets, where did global investors and foreign central banks park their money? At the U.S. Treasury. In late January, as investors fled Turkey, Brazil, and other places, the yield on 10-year Treasuries fell back to 2.75%.

Where else could they go, though? Euroland, whose currency has remained stable despite the region’s recent problems, is a possibility, but it lacks a common bond market. Japan hasn’t inspired confidence for the past couple of decades, and its government is keen to avoid speculative inflows. Switzerland is too small, as is the U.K. Bitcoin, even if it eventually becomes a commonly accepted means of payment, hardly looks like a reliable store of value.

That leaves the renminbi, which already plays a significant role in global trade. As China overtakes the U.S. as the world’s largest economy, and Beijing removes restrictions on capital flows, the renminbi’s role as an investment medium is sure to grow.

But will the renminbi replace the dollar as the ultimate safe haven? Prasad, who used to work at the International Monetary Fund, is dubious.

So can we relax? Not necessarily. For now, despite the deficit, the government shutdown, and the Tea Party, the rest of the world has faith in us — or more faith than it does in the Greeks, the Italians, and the Chinese Communist Party. But trust has to be earned. The biggest threat to the dollar is still dysfunction in Washington.

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