The old monetary order which defines the dollar as a reserve currency for international finance is being questioned. The world moving away from the dollar as a reserve currency is unlikely, but a new Bretton Woods is developing as a hodgepodge of regional and bilateral deals which reduce the importance of the dollar. A new monetary order will place less emphasis on dollar policy as countries try to manage currency relationships basd on their changing trade flows.
The rhetoric of an alternative reserve currency will heat up and the dollar will face a risk premium which questions its reserve status. This is rhetoric which we have not seen before. This will place a dollar risk premium in the market based on reserve status questioning. China questions the stability of the dollar. Greenbacks take a hit. China and Brazil discuss a currency deal. Greenback takes a hit. Russia discuss a new reserve currency. The story is the same. This does not mean the financial actions of the players change in the short-run. We will still see dollar reserve accumulation. What will change is the speed of this accumulation and attempts at diversification. It does mean that the market will react to the rhetoric and see dollar market down-turns albeit temporary. The cumulative effect is a a higher risk premium on dollars.
Bretton Woods II was the era of savings glut and dollar dependency whereby exporting countries were willing to finance the consumer spending of the US. The system worked as long the engine of global trade continued to grow. If the US consumer continues to pull back and the export engine is further damaged the financial order will change.
The upcoming BRIC meeting in Russia is a perfect example of the new monetary order discussions. The BRIC's represent 15% of world GDP and 43% of global reserves. Any discussion without he US or the IMF suggests that the central role of the dollar is in question. A new monetary order will not occur overnight but there is no question that the future for the dollar will be diminished.
The rhetoric of an alternative reserve currency will heat up and the dollar will face a risk premium which questions its reserve status. This is rhetoric which we have not seen before. This will place a dollar risk premium in the market based on reserve status questioning. China questions the stability of the dollar. Greenbacks take a hit. China and Brazil discuss a currency deal. Greenback takes a hit. Russia discuss a new reserve currency. The story is the same. This does not mean the financial actions of the players change in the short-run. We will still see dollar reserve accumulation. What will change is the speed of this accumulation and attempts at diversification. It does mean that the market will react to the rhetoric and see dollar market down-turns albeit temporary. The cumulative effect is a a higher risk premium on dollars.
Bretton Woods II was the era of savings glut and dollar dependency whereby exporting countries were willing to finance the consumer spending of the US. The system worked as long the engine of global trade continued to grow. If the US consumer continues to pull back and the export engine is further damaged the financial order will change.
The upcoming BRIC meeting in Russia is a perfect example of the new monetary order discussions. The BRIC's represent 15% of world GDP and 43% of global reserves. Any discussion without he US or the IMF suggests that the central role of the dollar is in question. A new monetary order will not occur overnight but there is no question that the future for the dollar will be diminished.
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