Woe is the dollar

Ashby Monk

In some cases, SWFs owe their existence to the sponsoring governments’ interest in diversifying reserve assets away from T-bills and dollars. After all, if you were going to hold reserves, you’d like to maximize their return. Dollar denominated assets haven’t been particularly great in this regard. As a result, dollar diversification is gaining steam. As the Economist reports today:

“It is hard to see what the American authorities could do to bolster their currency even if they wanted to. Low yields offer little support to the dollar. The Fed seems highly unlikely to raise interest rates from their near-zero levels over the next 12 months or so.”

In addition, as the global economy comes out of the recession, the “safe haven” status may be a less compelling reason to park reserves in dollars. Indeed, we are already seeing many SWFs around the world increasing their appetite for risk. Moreover, we are also seeing a growing number of countries set up SWFs; the latest being Nigeria.

Does this spell trouble for the dollar? Or will the dollar persevere (once again) as the word’s reserve currency?

3 Responses to “Woe is the dollar”

  1. 1 rien huizer October 21, 2009 at 4:27 pm

    This looks more like trouble for the euro. The euro is still a “real economy”currency and it needs to be managed as such. If other real economy countries shadow a (vs the euro) weak currency, that should lead to a corrective response: an EU SWF for the purpose of maintaining a stable exchange rate between the Euro and a basket of industrial competitors. Tit for tat?

  2. 2 Ashby Monk October 22, 2009 at 2:12 pm

    That could be interesting.

  1. 1 Sovereign Wealth Funds Times » Wednesday, 21 October, 2009 Trackback on October 21, 2009 at 9:45 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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