USD is reserve currency as of now. Will it remain a reserve currency forever? My answer to this is, no. Power shifts, systems evolve and benchmarks change. To sum up, only some thing that doesnt change is, "change" itself.
USD overtook Gold Standards to become the reserve currency and mode of transactions, reason for it was, after world war 2, US was able to provide the stable currency to instable world. It took Gold as reserves and supplied with USD for transaction hungry countries.
Things went on moving at ease. But 3 things again came together and we started talking about all this.
Those 3 things are:-
1. Power Shift.
2. Systems Evolve.
3. Benchmarks Change.
Now let us look in detail of the situation using these 3 parameters.
Power Shift:- After World War 2, US emerged as one of the strongest country and with enough liquidity, it made USD as medium of trade. No other country till date was able to rival the USD. However now due to collaborative efforts, like Euro, BRIC (very nascent stage), something is trying to rival and give world an alternative. Reminbi is still way too behind to take on USD. Whole world deposits excess and surpluses in US Treasury and US can take virtually any number of deposits due to its scale, where as others cant. So there is power shift but still a long way to go.
2. Systems Evolve: SDRs (Special Drawing Rights) of IMF is based on basket of currencies and seems a wise options, as no single economy is expected to dominnate and if SDRs are choosen as world currency, the fate of it will be not only limited to only one Nation's economy. However the problem is, as there is no base country and SDRs are just like derivatives based on bunch of economies. So very complex to trade in capital markets and get the fair value.
3. Benchmarks Change:- USD atleast is no longer the only benchmark to compare GDPs etc. Countries do use other comparative measures, due to the voltility of USD, countries are finding it difficult to project stable numbers and estimates of their well being.
To conclude:- With power shifts, system evolvement, USD may not be the only currency of trade, but it certainly will be strongest for 10-15 years. Other currencies share will improve and something innovative can take place like SDRs. Other option could be basket of currencies. But if it is basket then why cant SDRs. Debate has just begun, time will tell the new shift, if and when it happens!!!
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