In this commentary, published on Tuesday, a commodity research analyst with Anagram Comtrade argued that the recent decline of the dollar is linked to erosion in the dollar's position as a reserve currency, which means that "excess dollar supplies could start flooding the market."[1]  --  "Loss of the dollar’s reserve currency status would be a huge blow to the United States," observed Renisha Chainani.  "It would drastically undermine the dollar’s value and cause Americans to lose many unique economic blessings that they have become used to.  Economic conditions in the U.S. may be about to radically change."  --  See here for a 68-page discussion entitled "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?" by Menzie Chinn of the Univ. of Wisconsin and Jeffrey Frankel of Harvard.  --  Their study concluded that "if all 13 EU members who are not currently in EMU join it by 2020, including the United Kingdom, then the euro overtakes the dollar a few years later.  We also find that even if some of these countries do not join, a continuation of the recent trend depreciation of the dollar, were it to occur for whatever reason, could bring about the tipping point even sooner.  --  Euro enthusiasts suffered some serious setbacks in 2005.  But most assessments of the sustainability and adjustment of the US current account see a role for substantial depreciation of the dollar in the future, whether operation via expenditure-switching or a valuation effect.  Our results suggest that such dollar depreciations would be no free lunch:  it could have consequences for the functioning of the international monetary system as profound as the loss of the dollar's pre-eminent international currenty system, and along with it the exorbitant privilege of easily financing US deficits." ...

1.

EURO COULD REPLACE DOLLAR AS A RESERVE CURRENCY
By Renisha Chainani

Commodity Online
October 30, 2007

http://www.commodityonline.com/news/topstory/newsdetails.php?id=3381

In the interview published in Stern magazine, Alan Greenspan (former FED Chief) said it was “absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency.”

If the former chairman’s words prove true, the dollar’s present downward slide will continue. Greenspan noted that at the end of 2006, two thirds of all currency reserves were held in dollars, as opposed to 25 percent for the euro. If central banks continue to increase euro proportions at the expense of the dollar, demand for the dollar will fall and excess dollar supplies could start flooding the market.

In fact, this trend is already under way, as evidenced by the recent breakdown in the dollar’s value. Iran's central bank governor has said that the country has completed the process of diversifying its external reserves away from the dollar. Iran's move to diversify away from the dollar has been partly motivated by political tensions with the U.S. and partly due to the weakness of the dollar in the past two years.

In recent months, the dollar has hit all-time lows against the euro and multi-decade lows against many other currencies. The dollar has also reached new lows against oil and wheat, and a 28-year low against gold.

PERCENTAGE OF DOLLAR DEPRECIATION AGAINST OTHER CURRENCY (Jan. 1, 2007 -- Oct. 26, 2007 -- %)

Australian Dollar -- 0.7884 -- 0.9184 -- down 16.49%
British Pound -- 1.9593 -- 2.0522 -- down 4.74%
Canadian Dollar -- 0.8577 -- 1.0395 -- down 21.20%
Danish Krone -- 0.1770 -- 0.1931 -- down 9.06%
Euro -- 1.3201 -- 1.4394 -- down 9.04%
Japanese Yen -- 0.0084 -- 0.0088 -- down 4.27%
New Zealand Dollar -- 0.7047 -- 0.7663 -- down 8.74%
Norwegian Krone -- 0.1604 -- 0.1862 -- down 16.09%
Swedish Krone -- 0.1460 -- 0.1567 -- down 7.31%
Swiss Franc -- 0.8205 -- 0.8590 -- down 4.69%
Dollar Indez -- 83.27 -- 77.027 -- down 7.50%

On an average, Dollar has depreciated around 10% against major curriences from year to date and this is expected to continue. Greenspan also stated that although more countries still use the dollar as a reserve currency, the greenback doesn’t actually have “all that much of an advantage” over the euro any longer.

In terms of cross-border trade, the dollar accounts for 43 percent, while the euro is used in 39 percent of such transactions. Loss of the dollar’s reserve currency status would be a huge blow to the United States. It would drastically undermine the dollar’s value and cause Americans to lose many unique economic blessings that they have become used to. Economic conditions in the U.S. may be about to radically change.

--Renisha Chainani is a Commodity Research Analyst with Anagram Comtrade Ltd, Ahmedabad.