MercoPress. South Atlantic News Agency

Three candidates to challenge US dollar as dominant reserve currency

The US dollar was involved in 90% of all forx transactions in 2005

A new report from researchers at the International Monetary Fund sees at least three candidates that could eventually challenge the US dollar's role as the world's dominant reserve currency: the Euro, the Yen and the Chinese Yuan.

The US dollar was involved in 90% of all foreign exchange transactions in 2005, but “the prospect of competing on a par with the dollar as a global reserve asset is a possibility for economies with financial systems, international trade, and GDP that are comparable in size to those of the United States, and backed by policy-making institutions with similar credibility,” Isabelle Mateos y Lago, Rupa Dutagupta and Rishi Goyal wrote in a staff position paper released Wednesday.

The issuers of any currency looking to challenge the dollar's role, however, would face challenges of their own.

“Reserve currency status presents challenges in macroeconomic management for the issuer...the inability of the issuer to actively use exchange rates as a macroeconomic adjustment tool, volatility of short-term capital flows, and the implications for fiscal policy of the need to achieve greater depth in government securities' markets,” the authors wrote.

The authors are suggesting further study of alternative reserve currency systems, including those featuring multiple reserve currencies in which no one is dominant or based on its own quasi-currency, the strategic drawing right.

“Although there are few precedents, it is possible that several broadly substitutable reserve currencies could emerge over time--the main difference with today's system being the absence of a clearly dominant one,” they wrote.