In

Dollar We Trust?
Lam Quoc Anh Le Van Hoang Thai Nhat Linh Tran Trong Qui Pham Hong Son Phung Thi Tan Thanh Nguyen Minh Tu
P r e s e n t e d t o D r . L i n h N g u y e n

 A. INTRODUCTION ...................................................................................................3 B. BACKGROUND.........................................................................................................4 I. The Global Macroeconomic Context Since the 2007 Financial Crisis....................................................4 II. The Depreciation of USD Against Other Currencies...................................................................................5 III. The On-going Debt Crisis in Greece and the Stability of Euro ..............................................................6 IV. The Recent Currency Wars and the G20 Summit in South Korea in 2010.........................................7 C. THE MAIN FEATURES OF A DOMINANT CURRENCY .....................................8 I. Functions of Currency: ............................................................................................................................................8 II. Definition of Reserve Currency .......................................................................................................................8 III. Conclusion ................................................................................................................................................................9 D. DATA ANALYSIS & DISCUSSION .......................................................................10 I. The US Economic Growth History................................................................................................................... 10 1. Gross Domestic Product (GDP) .......................................................................................................................10 2. Stock Market...........................................................................................................................................................11 3. Unemployment.......................................................................................................................................................12 4. US Economic Outlook up to 2021 ..................................................................................................................13 5. Conclusion................................................................................................................................................................13 II. The US Balance of Payment and the Recent Currency Wars................................................................. 14 6. Reasons of Deficits in the US Balance of Payment..................................................................................14 7. The Recent Currency Wars ...............................................................................................................................15 III. The US National Debt and Monetary Policy.............................................................................................. 16 8. The US National Debt .........................................................................................................................................16 9. The US Monetary Policy .....................................................................................................................................18 IV. The Emerge of Other Currencies: CNY, EUR and JPY......................................................................... 20 10. China Yuan............................................................................................................................................................20 11. Euro..........................................................................................................................................................................21 12. JPY and GBP..........................................................................................................................................................21 E. CONCLUSION.........................................................................................................23 F. REFERENCES .........................................................................................................24

A. INTRODUCTION The US dollar was the international currency under the Breton Woods system in 1944. The dollar was used mostly in international transactions and exchange rates. As the United States is the world largest economy, the US dollar is currently the dominance currency in the world. However, the US dollar is gradually losing its dominance as the Reserve Currency of the world due to its depreciation against other currencies in the last decade. In addition, the US loses its importance in global economy; the weakness of US financial system during 2007-2009 and the recent currency wars among the United States, the European Union and China have led to the weakness of the dollar. According to the World Bank Report in 2011, the rising role of emerging markets now accounts for two thirds of the worlds foreign exchange reserves would reduce the important of the dollar in international trade and finance. The purpose of this report is to examine whether the US dollar will still be the dominant currency in global payments/reserves towards the next 20 years. The main data sources of the report are from the United States Government, the World Bank, the Federal Reserves and the IMF. The main structure of the report includes the introduction, background, main features of a dominant currency, data analysis and discussion and conclusion. The introduction will give the audiences the overview and the purpose of report. The background generates information regarding the global macroeconomic context since the 2007 financial crisis, the depreciation of the USD against other currencies, the on going debt crisis in Greece and the recent currency wars. In data analysis, the report focuses on the US economic growth history, the US Balance of Payment and the recent currency wars, the US National Debt and Monetary Policy and the emerge of other currencies. The conclusion will summary main points to confirm that US dollar will still be the dominant currency in global payments/reserves towards the next 20 years.

B. BACKGROUND I. The Global Macroeconomic Context Since the 2007 Financial Crisis

The U.S recent financial crisis resulted in the collapse of several large banks and financial institutions in the U.S and Europe. Many others were either taken over or bailed out by national governments (Martin, N. and Douglas, J. 2009). This included Northern Rock in the U.K (HM Treasury, Bank of England and Financial Services Authority 2007), Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, and AIG (Roger, C. 2009) in the U.S. Especially in Iceland, the whole banking system was wiped out. In additional, stock market has experienced a big downturn, the Dow Jones Average declined from 14,000 points in October 2007 to 6,600 points in March 2009 (Steven, F. 2011). Other indexes in the U.S and Europe suffered the same fate. In the U.S, housing underwent a big hit, resulting in numerous evictions and foreclosures (Martin, N. and Douglas, J. 2009). House prices dropped 20% to 35% while prolonged unemployment increased (IMF 2009). At the same time, consumer wealth decreased by 25% as well. Many key businesses filed for bankruptcy adding to ever-rising unemployment rate. The U.S growth rate declined and level of debts increased. As the result, worldwide economic activities declined significantly (IMF 2009). The whole world suffered a severe global recession in 2008 and might enter a double recession in 2010. In the first quarter of 2009, the annualized GDP rate in Germany declined 14.4%, in Japan 15.2%, in the UK 7.4%, in the Latvia 18%, in the Euro area 9.8% and 21.5% for Mexico (Martin, N. and Douglas, J. 2009). Governments and central banks responded with fiscal stimulus, monetary policy expansions and institutional bailouts. The U.S government granted a $700 billion bailout package; and IMF and Euro zone countries approved a 110 billion Euro bailout package (The New York Time 2011).

II.

The Depreciation of USD Against Other Currencies

The US dollar was considered as the international currency under the Breton Woods systems in 1944. Other currencies were pegged to the US dollar, which was fixed at $35/ounce of gold. However, it was terminated in the Nixon Shock in 1971(Controlling Inflation: A Historical Perspective). From 1965 to 1981, the US dollar lost two third of its value; and from 1981 to 2009, it lost one half of its value further (Lawrence, H. & Williamson, H. 2011). In the last decade, the US dollar has been steadily declining against all other major currencies. From 2000 to 2010, one US dollar exchanged for 1.0832 down to 0.6739 for the Euro, 107.80 down to 87.78 for the Yen, 0.6598 down to 0.4548 for the Sterling Pound, and 8.2784 down to 6.7696 for the RMB. (Figure 1). Figure 1: Historical Exchange Rate
1970* Euro Japanes e yen Pound sterling Canadia n dollar Mexican peso Renmin bi yuan Singapo re dollar South African Rand
Source:

1980* 240.45 0.44 84[6 0] 1.168 2.801 1.7050 -

1985* 250.35 0.8613 [60] 1.321 2.671 2.9366 2.179 2.2343 [61]

1990* 0.8343 146.25 0.6207

1993 0.85 51 111. 08 0.66 60 1.29 02 3.12 37 5.76 20 1.61 58 3.27 29

1999 0.93 87 113. 73 0.61 84 1.48 58 9.55 3 8.27 83 1.69 51 6.11 91

2000 1.08 32 107. 80 0.65 98 1.48 55 9.45 9 8.27 84 1.73 61 6.94 68

2001 1.11 71 121. 57 0.69 46 1.54 87 9.33 7 8.27 70 1.79 30 8.60 93

2002 1.05 78 125. 22 0.66 56 1.57 04 9.66 3 8.27 71 1.79 08 10.5 176

2003 0.8833 115.94 0.6117

2004 0.804 0 108.1 5 0.545 6 1.301 7 11.29 0 8.276 8 1.690 2 6.440 2

2005 0.803 3 110.1 1 0.549 3 1.211 5 10.89 4 8.193 6 1.663 9 6.360 6

2006 0.7960 116.31 0.5425

2007 0.7293 117.76 0.4995

2008 0.6791 103.39 0.5392

2009 0.7176 93.68 0.6385

2010 0.6739 87.78 0.4548

357.6 0.4164

1.081 -

1.1605 2.501 4.7832 1.903

1.4008 10.793 8.2772 1.7429

1.1340 10.906 7.9723 1.5882

1.0734 10.928 7.6058 1.5065

1.0660 11.143 6.9477 1.4140

1.1412 13.498 6.8307 1.4543

1.0298 12.623 6.7696 1.2458 6 11.731 61

0.7182

0.7780

2.5600

7.5550

6.7668

7.0477

8.2480

8.4117

Last 4 years 2005-2002 2003-2100 1996-1999 1993-1996 1990 1970-1992 1970-1985 Canada, China, Mexico

1. Mexican peso values prior to 1993 revaluation.

Furthermore, the inflation rate in the U.S however was well controlled in the last decade. It was 35% from 1987 to 1997; and it was only slightly reduced to 2% from 1997 to 2007 with Great Moderation, in which a Federal Reserves monetary policy was introduced with the aim of targeting price stability (Kenneth, M. 2010).

III.

The On-going Debt Crisis in Greece and the Stability of Euro

In 2010, it was made public that the Greek Government deliberately misreports its economic statistics. Greece paid Goldman $ 300 million to hide its ballooning debts. (Henry, B. 2010). The government revised the deficit from 3.7% at the early of 2009 to 6% then to 12.7% of its GDP by September (The Telegraph 2010). In May 2010, the deficit again was revised to 13.6% of the countrys GDP (Maria, P. 2010). The public debt was estimated at 120% of the GDP during 2010. In May 2010, in order to rescue Greece and the Euro, other Euro zone countries and the IMF had to agree on a rescue package for the country, giving an immediate 45 billion Euro in bailout loans with more fund to follow, totaling 110 billion Euros (Gabi, T. & Flavia, K., 2010). The strict terms and conditions that came with this austerity package resulted in riots and social unrest. Nonetheless, despite these austerity measures, the deficit has not been reduced and the countrys debt continues to rise rapidly (Times Topics European Union). Beside Greece, sovereign debt crisis was developed in 2009 in some European states and became tense in early 2010 (Greek Politician Expects Recession Will Linger). This included Ireland and Portugal and some EU countries outside the area (Fruits and vegetables - annual data). The widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany had created a crisis of confidence (Sustainable development in the European Union). If the Euro area is treated as a single entity, its economic and fiscal position does not look worse and in some respects, even better than that of the US and the UK. However, the area still lacked the support of institutional paraphernalia and mutual bonds of solidarity of a state (Economist Intelligent Unit 2011). In the wave of the sovereign debt crisis, there were some speculations that the area might be disintegrated a long with the disappearance of the Euro.

IV. The Recent Currency Wars and the G20 Summit in South Korea in 2010 In the G20 summit in South Korea in 2010, Guido Mantega, the Brazilian finance minister, signaled that global currency wars had broken out. With the world in recession, countries competed against each other to achieve a relatively low exchange rate for their own currencies to help export, domestic industries and employment. A mix of policy tools were used which include direct government intervention, the imposition of capital controls, and the indirect quantitative easing. The most intense battle was the conflict between the U.S and China over the valuation of the RMB since the early 2000s. It has been said that both the U.S and China were winning in this war, holding down their currencies while pushing up the Euro, the Yen and other currencies of many emerging countries. Even though the headline agenda of the 2010 G20 South Korea Summit was the risk of currency wars but limited progress was made. The war between currencies continues to make headlines; further complicating global trade all the while putting the spotlight on the issue of which currency would best facilitate global trade.

C. THE MAIN FEATURES OF A DOMINANT CURRENCY I. Functions of Currency:

There are two fundamental functions of currency: (1) the store of value or the measure of value; (2) the medium of exchange (1) Definition of 'Store Of Value' Any form of commodity, asset, or money that has value and can be stored and retrieved over time. Possessing a store of value is an underlying basis for any economic system, as some medium is necessary for a store of value in order for individuals to engage in the exchange of goods and services. As long as a currency is relatively stable in its value, money (such as a dollar bill) is the most common and efficient store of value found in an economy. (Investopedia 2011)

(2) Definition of 'Medium Of Exchange' An intermediary instrument used to facilitate the sale, purchase or trade of goods between parties. In modern economies the medium of exchange is currency. (Investopedia 2011) II. Definition of Reserve Currency A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate. A large percentage of commodities, such as gold and oil, are usually priced in the reserve currency, causing other countries to hold this currency to pay for these goods. Holding currency reserves, therefore, minimizes exchange rate risk, as the purchasing nation will not have to exchange their currency for the current reserve currency in order to make the purchase. (Investopedia 2011)

Currency composition of official foreign exchange reserves

1999 71% 18% 3% 6% 2% 2000 71% 19% 3% 6% 1% 2001 71% 20% 3% 5% 1% 2002 67% 24% 3% 5% 1% 2003 66% 25% 3% 4% 2% 2004 66% 25% 3% 4% 2% 2005 66% 24% 4% 4% 2% 2006 66% 25% 4% 3% 2% 2007 64% 26% 5% 3% 2% 2008 64% 26% 4% 3% 2% 2009 62% 28% 4% 3% 3% 2010 62% 26% 4% 4% 5% Q2 2011 60% 27% 4% 4% 5%

US dollar Euro Pound Yen Other

Sources: 1995-1999, 2006-2010 IMF: Currency Composition of Official Foreign Exchange Reserves 1999-2005 ECB: The Accumulation of Foreign Reserves III. Conclusion A US sovereign default would naturally be a game-changer (but such an event is highly unlikely). It is very debatable whether a higher level of inflation and/or exchange rate volatility would undermine USD reserve status. It is noteworthy that the recent US sovereign downgrade was followed by a flight into US Treasuries. More importantly, medium-term depreciation wont affect the dollars medium of exchange function, only possibly its store of value function. There is simply no high-grade bond market as liquid, deep and creditworthy as the US Treasury market. (Deutsche Bank Research 2011)

D. DATA ANALYSIS & DISCUSSION I. The US Economic Growth History

1. Gross Domestic Product (GDP) US has entered into a financial crisis since 2008, which led to a remarkably decrease in its GDP growth during this period. In 2008, US GDP growth rate stood still at 0 (zero) percent. In 2009, its growth rate declined sharply by 2.6 (two point six) percent (Figure 2). Figure 2: The U.S GDP from 2000 to 2010

Unit:Billion USD
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP

9,951

10,286

10,642

11,142

11,867

12,638

13,398

14,061

14,369

14,119

14,660

% Changes

4.10%

1.10%

1.80%

2.50%

3.60%

3.10%

2.70%

1.90%

0.00%

-2.60%

2.90%

Source: Table B-1 and B-4, Gross domestic product 1962-2010, United States Government Printing Office, Economic report of the president, 2011 The financial crisis was considered to be the consequence from the real estate bubble happening in 2005 2006, together with a huge amount of real-estate-linked loans.

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Subsequently, it led to the bankruptcy of quite a few big names in banking and finance sector: Lehman Brothers to name a few. The US financial crisis was also considered to be the root of the global financial crisis with series of bankruptcy, collapse and downturn in system of banks, stock prices and insurance companies. 2. Stock Market Stock prices decreased sharply in 2008-2009 period due to the financial crisis, which unfortunately lead to the fall at the lowest prices since 2000. NYSE index fell from 8,037 in 2008 down to 6,091 in 2009; Dow Jones from 11,253 to 8,876; S&P from 1220 to 948; and Nasdaq from 2,162 to 1,845. (Figure 3). Figure 3: The US Stock Market Indexes

Unit: points
Year NYSE index Dow Jones Index S&P Index NASDAQ Index 2001 6,398 10,189 1,198 2,035 2002 5,579 9,226 994 1,540 2003 5,547 8,994 965 1,647 2004 6,613 10,317 1,131 1,987 2005 7,349 10,548 1,207 2,099 2006 8,358 11,409 1,310 2,263 2007 9,649 13,170 1,477 2,578 2008 8,037 11,253 1,220 2,162 2009 6,091 8,876 948 1,845 2010 7,230 10,663 1,140 2,350 Sep11 7,099 11,175 1,174 2,524

Source: Page 31, United States Government Printing Office, Economic indicators, Sep 2011

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The stock market fluctuation was a signal for the economy performance, and it reacted sensitively to the economy. Those prices downside also showed the doubt and anti-trust of investors against the economy as soon as they received bad news on banks systems operation and performance. US stock market has not been got recovered much up to now. 3. Unemployment During 2001-2007, the average unemployment rate in US continuously increased at a rate of about 5 (five) per cent annually. This rate has increased since 2008 as a result of the financial crisis 2008, which was up to 5.8% in 2008, 9.3% in 2009, 9.6% in 2010 and still remained at 9.1% in 9 months of 2011. (Figure 4). Figure 4: The U.S Unemployment Rate from 2001 to September 2011

Source: Page 12, United States Government Printing Office, Economic Indicators, Sep 2011

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4. US Economic Outlook up to 2021 The Economic Report of the President in September 2011 presented a projection for US economy to 2021. Real GDP growth is expected to reach 3.1 per cent in 2011, around 4 per cent in 2012-2015 and sustainably at 2.5 per cent in 2018-2021. Unemployment rate is therefore put in Obama Administrations action plan to be reduced to 8.6 per cent in 2012, 7.5 per cent in 2013, and 6.6 per cent in 2014 and stably at around 5 per cent forward. (Figure 5). Figure 5: The US Economic Outlook up to 2021

Source: Page 51, United States Government Printing Office, Economic report of the president, 2011. 5. Conclusion Although US has been entered into the to-be-considered-ever worst financial crisis since 2008, and its negative affect is still going on in several aspects of the economy up to now, and as a result that has led to some wonders and doubt if the dominance period of US dollars in the global payment and reserves is about to end. However, the Government has been making a lot of great effort to improve the situation positively. With the projection in the Economic Report of the President, the economy is expected to recover soon at the end of 2011, and keep growing sustainable forward. Say, the projection

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is carried out well by the Government and all relevant sectors, US dollars is hence believed to be positioned as the dominant currency in 20 years.

II.

The US Balance of Payment and the Recent Currency Wars

The Balance of Payment is a method that is used to summary international monetary transactions during a period of time of a country. The Balance of Payment is divided into three main categories: the current account, the capital account and the financial account. The current account is an important grouping account of balance of payment, which shows the flow of goods, services, primary income and secondary income of a country. The capital transfers and credit and debit entries for non-produced nonfinancial assets are grouped into the capital account. The net acquisition and disposal of financial assets and liabilities are grouped into the financial account. In the balance of payment, the sum of current account and capital account represent the net surplus or net deficit of an economy and how the net surplus or net deficit is financed is measured by the financial account. (International Monetary Fund 2009). Currently, the US current account has been suffered by persistently rising external deficits, which are viewed to be highly negative for the US economy and US financial condition. 6. Reasons of Deficits in the US Balance of Payment The main reason for the U.S. current account deficits is the Chinese peg of its currency, Renminbi (Yuan) to the US dollar together with Chinas manipulation on the rate of exchange between its currency with the US dollar for the purpose of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. If China significantly appreciated its currency, the US export to China would rise, along with the reduction in importing from China. Thus, the US trade deficit would decline. Consequently, it results in the US trade imbalance. Chinese government has been planning to encourage weaken the Yuan relative to the US dollar by purchasing US assets (i.e. US Treasury bonds). This means that there would be a greater demand for the US dollar, and the dollar value moves higher, helping the Yuan to remain weak. Furthermore, although Chinas trade policy is criticized for being unfair and unethical, it stills generate many advantages

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for China such as low wages, lack of enforcement of safety and environmental standards, selling below cost and direct assistance from the Chinese government. Another cause of the deficits is the lack of savings in the US. According to economic theory, if a country saves less than the quantitative demand for investment, then capital would be imported from abroad, leading to a capital inflow. The current account deficit also implies an excess of investment over savings. It could equally be pointing to a highly productively, growing economy. Another reason to explain the deficits in the US balance of payment is the difference in methodologies of calculating the balance of payment lies on two different views: the residency-based and the ownership-based view of trade. The residency-based view measures the flow of goods and services within the nations borders. However, this view does not show how competitive of countrys companies in international market are. (McKinsey Global Institute 2004). Especially, in today, nearly one-third of the overall U.S current account deficit is caused by U.S Multinational Corporations activities abroad that can create enormous value for U.S. consumers, companies, and shareholders. Therefore, an ownership-based view needs to be applied to measure not only the competitive of US companies in international market but also to show a much smaller deficit of U.S. current account. (McKinsey Global Institute 2004). US ran a current account deficit for a long time due to its requirement of a large amount of money for investment purpose. Yet, it has been investing more than it has been saving. On top of that, it has been using many resources from other economies to meet its domestic consumption and investment requirements. US firms also import capital equipment and inputs from China to produce finished goods in US. In order to finance this massive current account deficit, the US has sold assets to the rest of the world in order to pay for their spending. Moreover, Treasury bonds might be called assets but they are really nothing more complicated than a loan. 7. The Recent Currency Wars

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The US, China, Japan and Europe countries have been involved in the recent currency wars. As of May 2011, China owned $1.16 trillion billion U.S. Treasury securities, which are accounts for 25.7% of total foreign holdings to the U.S. Treasury securities. Thus, China becomes the largest foreign holder of such securities. (Wayne, M. and Marc, L. 2011). However, China has expressed its concern about the safety of holding US bond debt. China criticized the U.S eased its monetary policy to boost economic growth such as buying US Treasury Securities and rescue the collapse of US corporations. The Chinese government stated that such policies led to a severe devaluation of the dollar against other currencies and increasing inflation in the U.S. This can lead to loss of property values in U.S. dollars of China. In contrast, the U.S. claims that China has kept the Yuan undervalued against other currencies to support exports. (Asian American Studies Center 2011). Furthermore, the U.S. government has threatened to use methods such as imposing tariffs and regulations on anti-dumping against China due to China valuates the Yuan currency below its real value and does not want to adjust the value of the Yuan at market prices. This creates the currencies conflict between China and US. (Asia News 2010).

III.

The US National Debt and Monetary Policy

8. The US National Debt The US national debt is made up of public debt and intragovernmental debt (GAO 2011). It was fairly stable at near $6 trillion from 1996 to 2000;however, it rose sharply after the bursting of the dot-com bubble in late 2000,resulting a debt of $14.8 trillion as of September 30, 2011. (Figure 6). Overly two-third of the debt is held by the public, in which includes individual investors, businesses and foreign governments who bought the US Treasury bills, notes and bonds. The rest is held by the federal government such as the Social Security Trust Fund, the Medicare Hospital Insurance Trust Fund, the Civil Service Retirement and the Disability Fund. (Figure 6).

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Figure 6: The US national debt status

Note: 2nd Aug 2011, Congress raised the debt ceiling to $15.2 trillion. Source: The U.S GAO The US Congress has had tightly restrictions on federal debt, including its purposes of borrowing and its statutory limit. Any unchecked growth in either public debt or intragovernmental debt will cause the increase in debt limit, in which, in turns might result in loosening of the monetary policy. The recent economic downturn and the crisis in financial markets have been the main reasons of recent debt buildup in the US. Taken into account the economic slowdown situation recently, the decision of raising the debt limit by the US Congress was essentially a decision to pay off the bills in order to maintain the full faith and credit of the US government. Failure to do so would result in default, or even worse, losing the credit on US bonds (CRS 2008).

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9. The US Monetary Policy The US monetary policy affects all kinds of economic and financial decisions, not solely in the US itself, but in the world as a whole as well. The main objective of monetary policy is to influence the availability and cost of money and credit, as well as the performance of the economy such as inflation, economic output and employment altogether to achieve the US national goals. The Fed Open Market Committee (FOMC), which is held by the Chairman of the Federal Reserve Board, has primary responsibility for conducting monetary policy. Simply put, by increasing or decreasing the amount of money flowing through the economy, FOMC can effectively influence the growth rate, either directly by changing the overnight fed funds rate or indirectly through the use of open market operations. Besides those two tools that are mostly used by the Federal above (discount rate and open market operations), FOMC also uses the reserve requirements as a great tool as well. Under the law, all financial institutions are required to set aside a percentage of their deposits as reserves to be held either as cash or as reserve account balances at the Reserve Bank in order to provide a more predictable demand for bank reserve, which increases the Feds influence over short-term interest rate changes when implementing open market operations (Federal Reserve 2011). The FOMC usually interact Treasury bond interest rate by increasing or decreasing the overnight fed funds rate. The process of fed funds rate spent four stages. Firstly, it moved in the narrow range from 5.25% to 6.50% in period 1996 2000. Secondly, FOMC lowered sharply from 6.50% to 1.00% in period Jan 2001 2003, after the bursting of the dot-com bubble in late 2000 and afterward recession. Thirdly, the U.S economy recovered in period 2004 2006 that the rate raised sharply to 5.25%. Finally, now it is just over zero a little bit at 0.25% (Figure 7) (Heleen, M. 2011).

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Figure 7: Fed funds rate, 10-year treasury and 30-year mortgage rate (%)

Source: Federal Reserve, Freddie Mac

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IV.

The Emerge of Other Currencies: CNY, EUR and JPY

10. China Yuan Over the last ten years, with its constantly magical growth in economics, China has been the spotlight in global economics. IMF, in its April report this year, has predicted in 2016, China will surpass US to become the world largest economy with its GDP reaches $19 trillion while US falls behind with $18.8 trillion (IMF World Economic Outlook 2011). Current foreign currency reserves of China in quarter 2 as declaration of China Central Bank was at its peak of 3.2 trillion USD, accounting for more than 30% of total global reserves. (IMF 2011). China invested heavily in the US government bonds with around 1/3 of its reserve, equivalent to 8% of total US government debt, first rank in term of foreign holders, according to the statistic of US department of treasury in 2011. With the recent depreciation of US dollars, Chinas reserve has decreased its value and they start to diversify their portfolio by buying gold. Beijing also confirms its ambition to promote the Yuan to become the new world currency in the new situation of the world: the increasing concerns about US national debt and European debt crisis. China has implemented some actions to market Yuan offshore as setting up some offshore centers for the Yuan as they did in Hong Kong which has brought a significant demand in Yuan deposit and planning in Singapore or providing trade credit in Yuan to encourage using Yuan in trading in stead of US dollar. However, China also faces many difficulties for their dream to replace USD as USD did to British pounds in the period from 1914 to 1924. Firstly, Chinas government has kept the exchange rate of CNY/USD at the undervaluation strategy to maintain its advantage in export together with its strict control over the Yuan to foreign investor. As a result, it limits the usage of the Yuan in global trading. Secondly, with the big portion of US dollars and government bonds in country reserves, China is put in the hard position to transfer this to other alternative investment without losing its value. More depreciation in US dollar will have direct impact of Chinas reserves. Thirdly, to become the major or dominant currency, it requires the development at a certain level of financial and banking system while China still has the long way ahead to reach. Lastly, the percentage of the Yuan in other nation

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reserves occupies a very small portion compared to US dollars or other currencies such as EUR, GBP or JPY, many efforts and clear strategies are required to market and convince the Yuan as the reserves currency. 11. Euro Since its introduction in Jan 1 1999, widely used in 17 of 27 member states of the European Union, solely managed by European Central Bank, Euro has become the second largest reserve currency. The creation of EUR was for the competition with US dollar in global trading and payment. According to IMF report in the second quarter of 2011, global reserve of Euro is 26% compared to 60% of US dollar. (Figure 8). Figure 8: Currency Composition of Official Foreign Exchange Reserves from 20062010 (from IMF) Latest Data '11 Quarter II 60.2% 26.7% 4.2% 3.9% 0.1% 4.9%

Currency US dollar Euro Pound sterling Japanese yen Swiss franc Other

'06 65.7% 25.2% 4.2% 3.2% 0.2% 1.5%

'07 64.1% 26.3% 4.7% 2.9% 0.2% 1.8%

'08 64.1% 26.4% 4.0% 3.1% 0.1% 2.2%

'09 62.1% 27.6% 4.3% 2.9% 0.1% 3.1%

'10 61.8% 25.9% 4.0% 3.8% 0.1% 4.5%

Before the debt crisis, with around 23 countries outside European zone pegged its currency to Euro, Euro was expected to fight for the US dollars dominant in global trading and payment. However, with severe situation, the separation of European Unions and the existing of Euro are big questions and therefore, Euro is far from replacement of US dollars.

12. JPY and GBP

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With the advantage of third and sixth largest economy in the globe (based on GDP 2010), JPY and GBP have been in the basket of diversified reserve currencies of many countries. However, the portion is just around 4% constantly (Figure 8) and investors havent seen many efforts from both governments to increase the power of JPY and GBP in the global economics. Many giant multinational corporations of Japan and UK confirm their biggest foreign market is the U.S and they have used US dollars for payment. Continue appreciation GBP and USD against US dollar is not the target of both Tokyo and London. Relation and connection in the financial market, as well as influence of US in terms of politics, Japan and UK at the current time still prefer to remain US dollars other than any new currency.

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E. CONCLUSION Although the US has been entered into the to-be-considered-ever worst financial crisis since 2008, which result in a remarkably decrease in its GDP growth; increase in US national debt, US current account deficits and high unemployment rate, the US Government has been making a lot of great effort to improve the situation positively such as improve real GDP growth in the period 2012-2021 and reduce unemployment rate. In addition, with the projection in the Economic Report of the President, the economy is expected to recover soon at the end of 2011, and keep growing sustainable forward. Furthermore, the report finds that it is difficult for China Yuan, Euro, Japanese Yen and British Pound to replace US dollars in the next 20 years. China will find many difficulties for their dream to replace USD such as the Chinas government has kept the exchange rate of CNY/USD at the undervaluation strategy, strict control over CNY to foreign investor, big portion of US dollars and government bonds in country reserves and the underdevelopment of Chinas financial and banking system. Also, with recent severe situation, the separation of European Unions and the existing of Euro are big questions and therefore, Euro is far from replacement of US dollars. In addition, continue appreciation GBP and JPY against US dollar is not the target of both Tokyo and London. Relation and connection in the financial market, as well as influence of US in terms of politics, Japan and UK at the current time still prefer to remain US dollars other than any new currency. In summary, the US Government has put much of effort to improve the US economy in the next five years and the hard situations for other currencies to replace the US dollars; thus, the US dollar will still be the dominant currency in global payments/reserves towards the next twenty years. As prediction that US dollar will still the dominant currency in the next 20 years, businesses need to keep their assets in US dollar, keep US dollar, hedging the dollar and trading by dollars.

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