Th€ Next Great Globa£ ¢urr€nc¥ TIE asked some of the THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY 888 16th Street, N.W., Suite 740 Washington, D.C. 20006 Phone: 202-861-0791 • Fax: 202-861-0790 world’s key experts: www.international-economy.com “Ten years from now, what will be the next great global currency?” 22 THE INTERNATIONAL ECONOMY SPRING 2008 The Dollar The U.S. dollar will continue to be the dominant international currency. The dollar EDWIN M. TRUMAN Senior Fellow, Peterson Institute for International Economics will reemerge. he U.S. dollar will continue to be the dominant interna- tional currency in ten years. It is still the only true inter- DAVID C. MULFORD Tnational currency; that is one that is used by parties that U.S. Ambassador to India and do not include U.S. residents. Do you see euro- denominated former Undersecretary for bonds issued in New York as dollar-denominated bonds are International Affairs, U.S. Treasury issued in London? Looking just at reserve holdings and con- sidering only developing countries as the most relevant hat goes around comes around. We have been group, it is true that since the first quarter of 1999, the dollar’s around this loop before. The dollar will reemerge as share has declined 10.6 percentage points in value terms, but Wthe U.S. economy restores its position in the world. in quantity terms the decline has been only 6.8 percentage points and the dollar’s decline was at a faster pace before the dollar’s peak in the first quarter of 2002 than since then. The dollar’s quantity share in the reserves of developing coun- tries is currently 38.5 percentage points ahead of the euro. At the recent pace of adjustment which has slowed since The dollar now, early 2002 during a period of substantial dollar depreciation, it would take the euro twenty-four years to catch the dollar in fifty years and in ten years it would still be more than 15 percentage points behind. the yuan. DINO KOS Managing Director and Head of Central Banks and Sovereign Wealth Funds, Morgan Stanley Asia Limited, and former Executive Vice President, Markets Group, Federal Reserve Bank of New York he U.S. dollar will remain the primary reserve currency ten years from now. Over a longer time horizon, say thirty or forty years, the next great currency—barring calamitous policy mis- Tsteps—will be the Chinese yuan. The longer period will be required to liberalize the Chinese economy, build up efficient money and capital markets, and foster the deep and liquid markets consistent with reserve currency status. SPRING 2008 THE INTERNATIONAL ECONOMY 23 The United States will come roaring back. The dollar and the JEFFREY E. GARTEN euro and the yuan. Juan Trippe Professor of International Trade and Finance, Yale School of Management KARL OTTO PÖHL Partner, Sal. Oppenheim Jr. & expect that after some setbacks the United States will come Cie., and former President, roaring back. All the talk about the growing economic power German Bundesbank Iof the European Union and China has some merit, but it is vastly overblown. The American economy will remain dom- inant, the U.S. capital markets the widest, deepest, and most innovative. ——————————————— ——————————————— Both the dollar and the euro. BARRY EICHENGREEN The dollar is currently Professor of Economics and Political Science, weak because of University of California, Berkeley nternational currency status is not a winner- major blunders take-all game. Only in exceptional periods like Ithe era of U.S. economic hegemony after World by the Fed. War II, when only the United States had deep and liquid financial markets open to the rest of the world, has a single currency dominated interna- tional transactions. To be sure, incumbency is an STEVE FORBES advantage—in politics and in the competition for President and CEO, Forbes Inc. global currency status alike. But ten years from now is not too soon to imagine a situation where he dollar will be the great global currency ten years from the dollar and the euro play roughly comparable now. It is currently weak because of major blunders by global roles. My choice, therefore, is both the dol- Tthe Federal Reserve, which has been printing too many lar and the euro, which are likely to cohabit greenbacks since 2004. That excessive money-making is why through the first half of the twenty-first century, all commodities have surged. In mid-2003 oil was selling at after which they may be challenged by the yuan. around $25 a barrel. Even with India, China, and central and eastern Europe booming and even with political turmoil in the ——————————————— Middle East, Venezuela, and Nigeria, there is no way the real price of oil and most other commodities should have almost quadrupled. The political fallout from rising inflation will The dollar and the euro. force the Fed and the next president to restabilize the belea- guered buck. PAUL DEROSA Then the dollar will again be king and all the talk of the Principal, Mt. Lucas Management Corp. need to diversify reserves into other currencies will fade away. In the meantime, though, the world will experience the unpleas- ant consequences, politically and economically, of the Fed’s mistakes. 24 THE INTERNATIONAL ECONOMY SPRING 2008 The dollar will remain The dollar will still first among equals. be the preeminent HENRY J. AARON Program Director, Economic Studies Program, global currency. Brookings Institution lthough other currencies will gain in importance, the dol- lar will remain first among equals because the U.S. econ- Aomy will remain the most flexible and most secure in the world. RICHARD N. COOPER Maurits C. Boas Professor of International Economics, ——————————————— Harvard University The dollar’s dominance will hile the euro will grow in relative importance, espe- cially in new members of the European Union and gradually diminish. Wnearby trading partners, the dollar will still be the pre- eminent global currency in both official and private hands a MICHAEL J. BOSKIN decade from now, reflecting not only institutional inertia but Professor of Economics and Hoover Institution Senior Fellow, also the strength of U.S. capital markets and the relative Stanford University decline of Europe in the world economy. en years from now, the U.S. dollar will still be the major ——————————————— global currency, although its dominance will continue to Tbe gradually diminished. The problems currently beset- The greenback. ting the United States financial system will have abated, although similar problems affecting other financial systems are PETER B. KENEN not yet fully transparent either. I expect U.S. growth to again Walker Professor of Economics and International Finance outpace Europe and Japan over the next decade, as the more Emeritus, Princeton University difficult demographic conditions in Western European coun- tries will combine with their high-tax welfare states to slow ——————————————— growth. Demography and minimal immigration will continue to slow Japan. However, the fraction of global commerce invoiced in other major currencies, especially the euro, will grow. Witness the Areva nuclear deal with the Chinese payable in euros. It is more likely than not that real oil prices and the U.S. current The dollar. account deficit as a share of GDP will decline. Nonetheless, the dollar will still be the most important international medium of exchange, and dollar-denominated assets will still be a rel- atively safe store of value, especially given political risk in much of the developing world and high taxes in Europe. But if the United States embarks down the path to a high-tax, bloated welfare state, the outlook for U.S. growth and the dollar will worsen. TADAO CHINO Senior Advisor, Nomura Research Institute, Ltd., and former President, Asian Development Bank SPRING 2008 THE INTERNATIONAL ECONOMY 25 The dollar now, the yuan in thirty. clearly the euro has already grown in importance, and it seems pretty inevitable that Chinese yuan usage is on the rise. So I MARC LELAND suspect the future will bring something between “some formal President, Marc E. Leland and Associates, and former or informal currency bloc” and “foreign exchange chaos.” As a Assistant Secretary for International Affairs, U.S. Treasury friend of the active investor, I sincerely hope the latter, or some- thing close to it. he dollar will have problems. The euro will play a more We are in an era of significant relative change. As I have important role but the dollar will still be the major world written for years, there is dramatic need for major reform of the Tcurrency—not the “great global currency” but greater International Monetary Fund, the World Bank, the G7 and the than any other. If you asked me to predict for thirty years from G8. If we get dramatic reform in the next ten years, then perhaps now, I might lean toward the yuan. a more stable foreign exchange environment might emerge, but without that relatively simple observable need to be fulfilled, ——————————————— why would anyone expect stability? The U.S. dollar. ——————————————— ANNE O. KRUEGER I expect the U.S. dollar to remain the Professor of International Economics, School of Advanced International Studies, Johns Hopkins University, dominant international currency. and former First Deputy Managing Director, International Monetary Fund JOHN WILLIAMSON Senior Fellow, Peterson Institute for he U.S. dollar is very likely to be the major currency ten International Economics years from now. While reserve holdings will probably be Tless concentrated in dollars than currently, the conve- expect the U.S. dollar to remain nience of using the dollar as the common denominator for the dominant international cur- transactions is important, and likely to mean that international Irency for a good bit longer than transactions will still be denominated predominantly in U.S.