World Bank Sees Dollar Reserve Status Ending Over Next Decade

Tyler Durden's picture

In a report released yesterday titled "Multipolarity: The New Global Economy", that other "bailout" organization, the World Bank, says that due to the developing world's pronounced greater growth curve through 2025 (expected to grow at 4.7% compared to 2.3% for the developed countries), the outcome will be that "The balance of global growth and investment will shift to developing or emerging economies." More importantly, as the FT summarized, a "different international monetary system will gradually evolve, wiping out the US dollar’s position as the world’s main reserve currency."  As a result of these "inevitabilities" (which will be interested to see how they are attained considering according to a recent report, the world will need to double its debt to double it GDP, so where all this new debt will come from we don't really know), there are three potential scenarios: i) A status quo centered on the US dollar, ii) A system with the Special Drawing Rights (SDR) as the main international currency, iii) A multicurrency system. And while this obviously covers every possible outcome so absolutely no value added there, the WB is focused on outcome iii and believes that the dollar will gradually shift away from its current position of reserve currency prominence. This is not surprising: after all it is none other than World Bank president Robert Zoellick who recently predicted a return to the gold standard and an end to USD hegemony. Our advice to Bob: stay away from penthouse suites at the Sofitel.

Most interesting in the report, which is for the most part trivial, is its analysis of ever greater Chinese relevance in global capital flows (much more in the slide presentation below):

More from the FT's take on this report:

The World Bank expects the US dollar to lose its solitary dominance in
the global economy by 2025, as the euro and the renminbi establish
themselves on an equal footing in a new “multi-currency” monetary
system.

The implications are wide-ranging. For instance, Mr Dailami said this
power shift would lead to big boosts in investment flows to the
countries driving global growth, with a significant increase in
cross-border mergers and acquisitions activity, and a changing corporate
landscape in which “you’re not going to see the dominance of
established multinationals”.

In addition, a different international monetary system will gradually
evolve, wiping out the US dollar’s position as the world’s main reserve
currency.

“The current predominance of the US dollar would end sometime before
2025 and would be replaced by a monetary system in which the dollar, the
euro and the renminbi would each serve as full-fledge international
currencies,” the report said, highlighting what it considered the “most
likely” of three scenarios for the currency markets in 15 years.

The dollar's successors: EUR and CNY.

The report identified the euro as the most “credible” rival to the US dollar, with one caveat. “Its status is poised to expand, provided the euro can successfully overcome the sovereign debt crises currently faced by several of its member countries and can avoid the moral hazard problems associated with bail-outs of countries within the European Union,” the report said.

On China, the report noted that authorities there had already started “internationalising” the renminbi by developing an offshore market in the currency and encouraging the use of the renminbi in settling and invoicing international trade transactions.

“A larger role for the renminbi would help resolve the disparity between China’s great economic strength on the global stage and its heavy reliance on foreign currencies,” the report said.

The report's conclusions summarized:

  • The
    postwar global economic structure –defined by the dominant position of
    advanced countries –is in the midst of a fundamental change
  • Rapid globalization and expected higher growth rates in emerging
    market economies will translate into greater economic influence for
    developing countries
  • The move to multipolarity will be by and large positive for developing countries, but the transition needs to be managed

Full report:

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