In a globalized economy, the use of a single dominant currency allows for ease and efficiency of trading between countries. With each country having their own currency, trading with multiple partners is more difficult when having to pay for goods and services from each trading partner in varying currencies. The single dominant currency needs to be one that is stable and can easily be bought and sold. For over 60 years, the United States dollar has taken on this role and had been the world’s primary reserve currency used for global trading.
Over the past few months, there has been talks of and moves made between trading partners to ditch the US dollar and trade in their local currencies. An example of this is agreement between Brazil and China to trade in their local currencies and bypass the US dollar. This can be beneficial to the participating countries as converting to a third currency can be more costly than making payments in the local currency. Since the move by Brazil & China, more countries have expressed interest in taking similar actions for varying reasons. There are now talks of the BRICS countries (Brazil, Russia, India, China & South Africa) possible developing a single currency. This currency would be tied to a basket of the individual currencies that each country currently uses: The Brazilian Real, Russian Ruble, Indian Rupee, Chinese Yuan, and the South African Rand.
This has given rise to persons questioning the ability of the US dollar to maintain its dominance. The truth is the dollar’s dominance is unlikely to change soon and will remain the principal currency for international trade and transactions. Countries outside of the BRICS would still require the US dollar for settling trade obligations and therefore maintain demand for the dollar. The dominance may reduce somewhat, if local currency trading becomes increasingly the norm, but it is unlikely that the US dollar will be replaced as the world currency anytime soon.
Investors have been looking at their US dollar investment portfolios and asking if they should maintain their positions or look to diversify into other currencies. Given the unlikelihood of the US dollar falling from glory any time soon, investors should not look to immediately exit their positions and should carefully analyze the alternatives. The interest rates on US dollar investments, when compared to other established currencies, are more attractive. There are also more opportunities to diversify across various sectors and geographical regions as most issues globally are denominated in US dollars.
Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at email@example.com.