Part 1
The USD is by far the most important international currency, although declining in recent years, especially as regard central banks’ FX reserves. New currencies have emerged (of which the RMB), central banks diversify their portfolios (especially in Asia), while some “old” currencies gain ground (the JPY and gold, to some extent). Moreover, even if two contenders exist at present (the euro and the RMB), the USD is the only currency to be considered as an international currency as regard all its characteristics: reserve currency, invoicing currency, vehicle currency, reference currency … It is the only one to be worldwide accepted, and the US, through structural (recurrent) fiscal and current account deficits (and through the balance sheet of the Fed), never stopped feeding the global liquidity market (a major difference with Germany, for example). However, the international status of the USD might diminish further in the long term depending on 6 conditions:
- The pursuit of FX reserves diversification by Asian central banks into alternative currencies and into gold;
- The continuation of the internationalization of the RMB as a contender of the USD, alongside with the Euro;
- The capacity of the Eurozone to improve the institutional and economic set-ups:
- The political and economic will of the Eurozone (especially Germany);
- The difficulty of the US to attract international savings (as they do since the 1970s) to finance structural twin deficits;
- The foreign policy of the US administration;
To reinforce the international role of the Euro, Europe has to consolidate and improve the euro-area institutional set-up. Some examples: the completion of the European Banking union, progress on capital markets union, better credit quality of “peripheral” sovereign bonds. The issuance of a common “federal” bond, with a role similar to that played by Treasuries in the US, would significantly increase the international role of the euro. Progress in the set-up of euro-area economic policy, in its fiscal and structural components, and a more united, and thus more effective, external and defence policy would favour greater international use of the euro. Speaking one voice more regularly on critical issues would also be a “plus” for the euro, without any doubt.
If China wants the yuan to become an international currency, some prerequisites are to be met: capital market liberalisation, capital account openness, capital controls abandoned, full convertibility of the currency... However, the emergence of a true international currency is a very long process. Moreover, in history, financial instability seems to be the only factor that can change quickly the sharing of the world of international currencies.
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