World Bank: Dollar to Cede Dominance as Euro, Yuan Rise

May 17, 2011
Yuan will become powerful alternative by 2025, study concludes.

The rise of the euro and China's yuan will likely spell the end of the U.S. dollar's dominance of the global financial system by 2025, a World Bank study released Tuesday concludes.

But it also said the the International Monetary Fund's basket-based pseudo-currency, the SDR or special drawing right, could also gain weight as countries and businesses seek to reduce the risk of foreign-exchange shifts.

The study says China will have to internationalize the yuan, officially known as the renminbi, to better support its industrial and trade development, and that within just over a decade the currency will become a powerful alternative to the euro and the dollar.

With the emergence in global industry and trade of new, large economic powers -- particularly China, Brazil, India, Indonesia, South Korea and Russia -- "one sees that their currencies -- particularly the renminbi -- will inevitably play a more important role in the international financial system," the study says.

"A larger role for the renminbi would help resolve the disparity between Chinas great economic strength on the global stage and its heavy reliance on foreign currencies."

The study, "Multipolarity: The New Global Economy," said the euro is already offering a credible alternative to the dollar.

"Its status is poised to expand, provided the euro area can successfully overcome the sovereign debt crises currently faced by several of its member countries and can avoid the moral hazard problems associated with bailouts of countries within the European Union."

But it said that other countries with less powerful currencies will continue to see policy choices constrained by how the key currencies are managed and traded.

"Unless a country's borrowing and trade are concentrated in one of the three key currencies, instability in exchange rates between the key currencies will lead to fluctuations in competitiveness and the value of assets and liabilities, impeding that country's economic policy making and potentially jeopardizing the welfare of its residents."

"Some of the challenges facing the international monetary system could possibly be managed through increased use of the SDR," it added.

The IMF's special currency, created in 1960, is already used as an international reserve asset and a unit of account, though not in trade or other forms of finance.

It is based on the dollar, the euro, the Japanese yen and Britain's pound.

"Enhancing the role of the SDR in the international monetary system could help address both the immediate risks to global financial stability and the ongoing costs of currency volatility," the study concluded.

Copyright Agence France-Presse, 2011

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