Could the U.S. Dollar Fade as the World's Default Currency?

The Asian Development Bank (ADB) recently added the Yuan and the Rupee as official trade currencies in their trade finance program, which guarantees currency exchanges between Asian banks. The ADB?s decision was made after noting that:

• The number of transactions that are settled in the Yuan and the Rupee have increased dramatically in the last year ? Yuan currency trades are up almost 50%
• The number of banks engaged in bilateral currency trading with China and India continually increases
• While nearly 90% of currency trades are settled in US dollars, the ADB projects that percentage will fall significantly in the next 10 years

The ADB?s decision to make the Yuan and the Rupee official trade currencies is a clear signal that many of Asia?s banks want to be prepared to adopt a new default currency. If the US dollar continues to lose favor with Asian currency traders, the ADP must be able to guarantee transactions in the Yuan or Rupee.

Why The US Dollar May Fade As The World?s Default Currency

For decades ? and indeed still today ? more than 90% of the globe?s financial transactions are settled in US dollars. This is because many investors feel that the US Dollar is the safest, most stable currency available, making it the best denomination to ?hold? between transactions.

While the recent decline of the Euro has served to bolster the Dollar in the short term, Europe?s challenges with their regional currency have cast doubts on the stability of the US Dollar in the long term. Many believe that the Euro?s decline has been caused poor financial management on behalf of European governments ? specifically, financially unsustainable government spending.

While the US government currently maintains a manageable debt and deficit, the concern for the future is that US government debts will grow to a point where they can no longer be serviced. If that were to happen, the US Dollar would likely suffer a sharp decline in value. Therefore, many banks and financial institutions around the world are investigating alternate currencies.

Singapore Exchange Endorses Yuan As Well

The likelihood that the Chinese Yuan (or renminbi) will one day become the world?s default currency took a small step forward earlier this month, when the Singapore Exchange announced that they would begin to quote, trade, and settle transactions in the Yuan. The Singapore Exchange hopes to become a hub of off-shore Yuan trading, a signal that many in Singapore?s financial industry see the Yuan growing in global importance.

All of these changes show that the Chinese Yuan and Indian Rupee are likely to continue to grow in importance in Asia. Considering that Asian economies could one day account for more than half of all the world?s economic activity, this is big news.

Author Rick Silver covers global currency news for Sunbird FX, a leading Forex trading provider with its Sunbird cfd broker and forex daily analysis.

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Source: http://etiksite.org/finance/the-chinese-yuan-and-indian-rupee-continue-to-grow-in-regional-importance

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