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July 7, 2011, 12:00 a.m. EDT
By Matthew Lynn
LONDON (MarketWatch) "” In London last week some smart businessmen launched the country's first gold ATM. Stick in your credit card or some cash, and the machine will swap your plastic or paper money for a small bar of the real stuff.
That may well tell us that London remains, as it always has been, a place where monetary entrepreneurs flourish.
But it tells us something else as well. The role of money in the global economy is one of the big themes of this decade. Gold is on the up. The euro is falling apart. And, perhaps most importantly of all, the dollar /quotes/zigman/1652083 DXY +0.02% is in long-term decline.
The crisis in the euro zone may have distracted our attention from it for a while, but the relentless dethroning of U.S. currency the dollar as a global reserves currency is proceeding apace.
IMF's new managing director, Christine Lagarde, said the global economy remains fragile. She said addressing the European debt crisis will be a top priority. Video courtesy of Fox News.
There were two further pieces of evidence in the last few days. Data released by the International Monetary Fund showed the percentage of dollars held by central banks in their reserves is still declining year on year. And a UBS survey of investment institutions with $8 trillion under management showed a majority no longer think the dollar will be the reserve currency in 25 years time.
There cannot be much dispute that the dollar is losing its central role. And yet there is still very little agreement on what will replace it. Gold /quotes/zigman/700181 GC1Q -0.12% ? The Chinese renminbi /quotes/zigman/4869230/sampled USDCNY -0.0526% ? The IMF's quasi-money, the special drawing right? Or something no one has thought of yet. No one really knows.
If there is one big call investors need to get right over the next few years, it is surely answering that question.
/quotes/zigman/1652083 DXY 75.03, +0.02, +0.02% The dollar's slow slide The dollar index shows how the greenback has strengthened, then weakened.
The figures make it clear enough that the dollar is not the force it once was. The proportion of dollars held by central banks around the world had fallen to 60.7% by the end of the first quarter of this year. That compares with 61.8% at the same point last year. That may not sound much, but as Stephen Lewis of London-based Monument Securities points out, that amounts to $58 billion fewer dollars held than if the percentages had stayed the same. Not exactly loose change, even among central bankers.
Measured over a decade, the trend is clear enough. Go back to 2001, and the proportion of central bank reserves held in dollars was 71%. It only goes down a bit every year. But over time, that starts to add up. Once the dollar drops below 50% of central bank holdings, we can officially declare that its days as the reserve currency are done. It looks like that will happen some time between 2015 and 2020 "” but it could well be sooner.
Most big asset managers now agree. A UBS survey of investment institutions showed a majority no longer think the dollar will be the reserve currency in 25 years time "” the first time the investment bank had reported a clear majority reaching that conclusion. The euro has lost support as well: only about 5% of fund managers think it will be the world reserve currency in a quarter of a century, down from around 20% five years ago. The Asian currencies are not making much headway, nor, rather surprisingly is gold. The big winner is the SDR. A majority now reckon it is the most likely candidate, compared with roughly 10% last year.
In some senses, that is reasonable enough. A basket of the world's biggest currencies would seem to offer a more solid store of value than just one. It diversifies your risk. And it recognizes that the U.S. is just one major economy among several, not the dominant player as it was in the years immediately after World War Two.
And yet the SDR is, in fact, a poor contender. It is just made up of a bunch of other currencies "” right now, the dollar, the euro /quotes/zigman/4867933/sampled EURUSD -0.0978% , the pound /quotes/zigman/4867886/sampled GBPUSD -0.1211% and the yen /quotes/zigman/4868099/sampled USDJPY +0.0742% "” none of which look very strong. If you get into a fight, having four hundred-pound weaklings on your side isn't much better than having one. It doesn't really have any advantages over the dollar by itself as a store of value. And it has all the same weakness. If the Federal Reserve or the Bank of Japan starts printing money like crazy, your SDR goes down in value the same way your dollar would. You've gained nothing.
In reality, there are two real candidates to replace the dollar.
One is the renminbi. The world's reserve currency is usually the money that circulates in the world's biggest economy. That was true of the pound in the 19th century, and the dollar in the 20th. And if the Chinese economy is the world's biggest, as it soon will be, that is going to be the currency that really counts.
Another possibility is a currency unit based on a basket of commodities. After all, raw materials are the one thing that every country absolutely has to have access to. And every form of money is a proxy for real stuff in one way or another. A unit that was one part gold, one part oil, one part iron ore, and one part rice, would look like something that was going to hold its value for a long period of time.
What will it be? It makes a huge difference. If it is the renminbi, you need to buy into Chinese assets, regardless of the fact they may look over-valued right now. If it becomes a reserve currency, everyone in the world will have to hold it. The Chinese will get a lot of very cheap capital, just as the U.S. did when the dollar was dominant.
But if it is a commodity-based currency unit "” and that would be this columnist's bet "” then the one big call you need to make for the next decade is to keep buying raw materials even when they do look over-priced. Either way, the euro looks finished, and the dollar is heading for a more minor role in the world economy.
And whatever else is happening in the global markets, that is one trend that trumps everything else.
/quotes/zigman/1652083 Add DXY to portfolio DXY U.S. Dollar Index (DXY) 75.03 +0.02 +0.02% Volume: 0.00 July 7, 2011 5:11a var embeddedchart231498199Chart = new EmbeddedChart('#embeddedchart231498199', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DXY'); jQuery.data($('#embeddedchart231498199').get(0), 'embeddedchart', embeddedchart231498199Chart); /quotes/zigman/700181 Add GC1Q to portfolio GC1Q Gold - Electronic (COMEX) Aug 2011 $ 1,527.40 -1.80 -0.12% Volume: 18,518 July 7, 2011 5:31a var embeddedchart185079162Chart = new EmbeddedChart('#embeddedchart185079162', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:GC1Q'); jQuery.data($('#embeddedchart185079162').get(0), 'embeddedchart', embeddedchart185079162Chart); /quotes/zigman/4869230/sampled Add USDCNY to portfolio USDCNY CNY/USD 6.4646 -0.0034 -0.0526% Volume: 0.0000 July 7, 2011 8:29a var embeddedchart1696038390Chart = new EmbeddedChart('#embeddedchart1696038390', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:USDCNY'); jQuery.data($('#embeddedchart1696038390').get(0), 'embeddedchart', embeddedchart1696038390Chart); /quotes/zigman/4867933/sampled Add EURUSD to portfolio EURUSD USD/EUR 1.4305 -0.0014 -0.0978% Volume: 0.0000 July 7, 2011 9:41a var embeddedchart2139702522Chart = new EmbeddedChart('#embeddedchart2139702522', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:EURUSD'); jQuery.data($('#embeddedchart2139702522').get(0), 'embeddedchart', embeddedchart2139702522Chart); /quotes/zigman/4867886/sampled Add GBPUSD to portfolio GBPUSD USD/GBP 1.5984 -0.0019 -0.1211% Volume: 0.0000 July 7, 2011 9:41a var embeddedchart1634058767Chart = new EmbeddedChart('#embeddedchart1634058767', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:GBPUSD'); jQuery.data($('#embeddedchart1634058767').get(0), 'embeddedchart', embeddedchart1634058767Chart); /quotes/zigman/4868099/sampled Add USDJPY to portfolio USDJPY JPY/USD 80.9700 +0.0600 +0.0742% Volume: 0.0000 July 7, 2011 9:41a var embeddedchart656411651Chart = new EmbeddedChart('#embeddedchart656411651', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:USDJPY'); jQuery.data($('#embeddedchart656411651').get(0), 'embeddedchart', embeddedchart656411651Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //});Matthew Lynn is a financial journalist based in London. He is the author of "Bust: Greece, the Euro and the Sovereign Debt Crisis," and he writes adventure thrillers under the name Matt Lynn.
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