The future of the dollar as a reserve currency has been in question recently as comments by policy makers globally have turned decidedly gloomy about the dollar’s prospects.
Foremost in the minds of analysts and government finance officials is the U.S.’s continuing policy of quantitative easing, which is flooding the market with more dollars, as well as the sizable (and swiftly growing) debt load of the U.S. government.
On Monday, the dollar fell against six major currencies, including the pound, the yen, the Swiss franc, and the Canadian dollar. The lift that the currency received following unrest in Egypt was short lived.
“I’m more optimistic about the euro gaining strength as a potential reserve currency,” Bank of Israel Governor Stanley Fischer said during a panel discussion at the annual World Economic Forum in Davos, Switzerland. “We ourselves are diversifying into currencies which we would never have put in the reserves before, including the Australian dollar and so forth,” he added.
Bank of Canada Governor Mark Carney and Fischer anticipated that, in the long run, Asian monies would have a greater role as reserve currencies. “I agree with Stan (Fischer) that over time there will be more of a multi-polar system. Other currencies will play a central role in reserves,” he said. “The (Chinese) renminbi, over time, should have a role as a reserve currency.”
Recent comments by some prominent institutional investors and market pundits have also shown a decidedly pessimistic view on the direction of the dollar. In his recent year-end letter, hedge fund magnate John Paulson wrote that “We are optimistic about [gold] over the next five years and believe it is an ideal vehicle to hedge against the risk of U.S. dollar depreciation that could result from quantitative easing (QE).”
Marc Faber, author of the Gloom Boom & Doom Report, recently said that “If you measure the stock market not in dollars but gold, it is down 80% since 1999. I no longer regard the U.S. dollar as a valid unit of account. People shouldn’t value their wealth in dollars because one day, in dollars, everyone will be a billionaire.”
Bill Gross, manager of the world’s largest bond fund at PIMCO, painted a bleak picture for the future of the U.S. dollar. “We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential.”
Historically, the price of gold has had an inverse correlation with the strength of the U.S. dollar, as investors seek to preserve their purchasing power and purchase gold as an “alternative currency.”
Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.
(Sources: “Gold Price Sinks, but Paulson Remains a Gold Bull,” GoldAlert.com, January 31, 2011; “Dollar turns lower after US reports,” Bloomberg, January 31, 2011; “Policymakers see dollar losing reserve currency allure,” Reuters, January 31, 2011)