As some developing countries become the major drivers of global economic growth and are less dependant on the US dollar on their financial exchanges, the US dollar will become merely one of the three reserve currencies, along with the euro and the renminbi, said Paul Kennedy, a world-renowned historian, in an op-ed piece on the website of Bloomberg Businessweek magazine on July 6, 2011.
According to Kennedy, recent weeks have witnessed a heated debate among bankers and economists regarding how the world will look should the US dollar lose its peculiar status as the world's only reserve currency. Especially with the steady appreciation of the value of the yuan (renminbi) and China's enormous capital surpluses, it is a only a matter of time before the yuan attains reserve-currency status, suggested a special feature in The Wall Street Journal of June 2 on the rise of China's financial muscle.
Meanwhile, the United State's credit has come into question as the Moody's ratings agency cautioned on June 2 that it may soon downgrade its government's credit rating if it does not get its colossal deficits in better order. "A lowered rating would mean higher interest rates (a horrible time for that), and America may be losing its exceptionalism and may be increasingly subject to the harsh credit tests under which all other nations and currencies labor," warned Kennedy.
It is sensible to "distribute your eggs into more than one basket", as the future of the US dollar is uncertain, noted Kennedy. Actually, only about 61 percent of foreign reserves are denominated in dollars, and it drops each year. "After all, by far the world's three largest economies by 2025 will be the United States, the EU and China, so why should one of them shoulder the burden of having the only reserve currency?"
But the consequences for the United States are colossal if it happens by 2025, or 10 years later, said Kennedy, as the transition will come at a cost. "Gone will be the days when America could simply find its way out of colossal debts by printing even more dollars, as no other country could. The rest of the world would by then have other options, and Moody's and its sister credit-rating agencies could keep downgrading America, turning it into a normal country that might - horrors - have to adopt the same good-housekeeping rules regarding taxes, spending and deficits as Germany or Switzerland."