August 1, 2011 Commodity currencies and yuan increasingly favoured over US dollar
Singapore, According to the IMF, the US dollar's share of global foreign exchange reserves has fallen to 60 per cent from 70 per cent a decade ago.
While traditional alternatives to the US dollar have been the Euro, the Japanese Yen and the Swiss Franc, triple-A rated currencies with commodity exposures like the Australian and New Zealand dollars, appear to be gaining ground.
Foreign exchange reserves are kept by countries in order to facilitate trade with each other. The declining proportion of the US dollar sends a signal that countries are less confident of the stability and value of the currency, due to its long-term budget deficit.
Analysts estimate that these commodity currencies account for five per cent of global currency reserves today, up fivefold from a decade ago.
As countries store more of their wealth in other currencies, the world could see fewer trades settled in US dollars.
Thio Chin Loo, Senior FX & IR Strategist (asia) with BNP Paribas, said: "If you assume that the US will get downgraded to double-A from triple-A, then it only leaves - in the developed world - Australia, Canada, Norway and Sweden as the only developed countries with a triple A status. These currencies have the added benefit of the very strong commodity prices."
But most analysts believe it will not be easy to displace the US dollar as the world's reserve currency. This is because, for now, there is no other currency or bond market that can rival the US in terms of size and liquidity.
Wong Sui Jau, General Manager of Fundsupermart, said: "Diversifying out of US debt is not an easy option, simply because at this point in time, there're not that many other bonds you can actually hold which is liquid enough which can accept huge amounts of money in and out quite easily."
Analysts expect the dollar to remain the reserve currency for a couple more decades but portfolio reallocation in the forex segment will continue as central banks around the world seek to diversify risk.
That would mean the US dollar will continue to lose ground, especially against triple-A commodity currencies and Asian currencies like the Chinese yuan.
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