Lame Ducks in Love

Just as the US recently pressed European leaders to rescue the euro, owing to fears that a collapse could weaken the dollar, so American policy makers in the 1960's sought to prop up that era's second-leading international reserve currency, the British pound. With the renminbi as a reserve option, the euro and the dollar would be freed from their forced marriage.

FLORENCE – Fears about sovereign debt and doubts about the euro rescue package have pushed the question of international reserve currencies to the fore. Until this spring, most observers had assumed that the share of the dollar in international reserves would gradually fall, while that of the euro would rise, and that the world would gradually and smoothly make a transition to a multi-reserve regime.

Up to now, the global financial crisis was historically remarkable in having no major impact on foreign-exchange markets. The shares of the major reserve currencies were stable, with the dollar accounting for 62% of foreign-exchange reserves in 2009 and the euro 27%. Any major changes came not from deliberate decisions by central banks to reallocate reserves, but rather from the simple arithmetic of changing exchange rates: a stronger dollar raised the dollar’s share in total global reserves, while a weaker dollar reduced it.

In fact, a sort of balance of terror obstructed any major reallocations by the big holders of reserves. An effort to diversify by selling a particular asset would have such a large impact on markets that it would produce large losses for any central bank that tried it.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/XT65EdL;
  1. Patrick Kovarik/Getty Images

    The Summit of Climate Hopes

    Presidents, prime ministers, and policymakers gather in Paris today for the One Planet Summit. But with no senior US representative attending, is the 2015 Paris climate agreement still viable?

  2. Trump greets his supporters The Washington Post/Getty Images

    Populist Plutocracy and the Future of America

    • In the first year of his presidency, Donald Trump has consistently sold out the blue-collar, socially conservative whites who brought him to power, while pursuing policies to enrich his fellow plutocrats. 

    • Sooner or later, Trump's core supporters will wake up to this fact, so it is worth asking how far he might go to keep them on his side.
  3. Agents are bidding on at the auction of Leonardo da Vinci's 'Salvator Mundi' Eduardo Munoz Alvarez/Getty Images

    The Man Who Didn’t Save the World

    A Saudi prince has been revealed to be the buyer of Leonardo da Vinci's "Salvator Mundi," for which he spent $450.3 million. Had he given the money to the poor, as the subject of the painting instructed another rich man, he could have restored eyesight to nine million people, or enabled 13 million families to grow 50% more food.

  4.  An inside view of the 'AknRobotics' Anadolu Agency/Getty Images

    Two Myths About Automation

    While many people believe that technological progress and job destruction are accelerating dramatically, there is no evidence of either trend. In reality, total factor productivity, the best summary measure of the pace of technical change, has been stagnating since 2005 in the US and across the advanced-country world.

  5. A student shows a combo pictures of three dictators, Austrian born Hitler, Castro and Stalin with Viktor Orban Attila Kisbenedek/Getty Images

    The Hungarian Government’s Failed Campaign of Lies

    The Hungarian government has released the results of its "national consultation" on what it calls the "Soros Plan" to flood the country with Muslim migrants and refugees. But no such plan exists, only a taxpayer-funded propaganda campaign to help a corrupt administration deflect attention from its failure to fulfill Hungarians’ aspirations.

  6. Project Syndicate

    DEBATE: Should the Eurozone Impose Fiscal Union?

    French President Emmanuel Macron wants European leaders to appoint a eurozone finance minister as a way to ensure the single currency's long-term viability. But would it work, and, more fundamentally, is it necessary?

  7. The Year Ahead 2018

    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now