Currency Update: Rupee at 3-week high vs USD
By Sanjeev Sanyal
The relative economic decline of the US has led many economists and policymakers to question the US dollar's position as the world's anchor currency. Suggested alternatives range from a global reserve system to even a return to gold. While recent efforts to internationalise the Chinese yuan have only added to the expectation of a shift in the international monetary system, we believe the US dollar will remain thedominant global currency for a long time to come.
History shows that the global economic system has often been based on an asymmetric relationship of an anchor economy - currently the US - that runs persistent current account deficits even as it providesliquidity to the rest of the world. This leads to a symbiotic relationship where the anchor country gets cheap financing and the rest of the world gets the monetary liquidity needed to lubricate economic activity.
Unfortunately, history shows this system eventually breaks down because the anchor country needs to run continuous current account deficits in order to provide more and more liquidity needed by an expanding world economy, making it increasingly indebted over time. In turn, this undermines the very credibility on which the monetary system is based. This scenario was first described in the 1950s in relation to the Bretton Woods system by Robert Triffin and has since become known as Triffin's Dilemma.
The relative economic decline of the US has led many economists and policymakers to question the US dollar's position as the world's anchor currency. Suggested alternatives range from a global reserve system to even a return to gold. While recent efforts to internationalise the Chinese yuan have only added to the expectation of a shift in the international monetary system, we believe the US dollar will remain thedominant global currency for a long time to come.
History shows that the global economic system has often been based on an asymmetric relationship of an anchor economy - currently the US - that runs persistent current account deficits even as it providesliquidity to the rest of the world. This leads to a symbiotic relationship where the anchor country gets cheap financing and the rest of the world gets the monetary liquidity needed to lubricate economic activity.
Unfortunately, history shows this system eventually breaks down because the anchor country needs to run continuous current account deficits in order to provide more and more liquidity needed by an expanding world economy, making it increasingly indebted over time. In turn, this undermines the very credibility on which the monetary system is based. This scenario was first described in the 1950s in relation to the Bretton Woods system by Robert Triffin and has since become known as Triffin's Dilemma.