The Federal Reserves most powerful branch head, President William Dudley of New York, made some stunning statements Tuesday that seemed to go largely unnoticed by the mainstream media.
At a conference in Zurich, Switzerland, sponsored by the IMF and the Swiss National Bank, Dudley said hes fine with other currencies challenging the supremacy of the U.S. dollar as the worlds reserve currency.
I dont see this as a zero-sum game, Dudley remarked. If other countries currencies emerge to gain stature as reserve currencies, it is not obvious to me that the United States loses, as long as it is being driven by their progress, rather than by the U.S. doing a poorer job.
New options besides the dollar: The more, the merrier, according to Dudley. Will more reserve currencies strengthen the international monetary system? My answer can be summed up in one word: yes, he said. The greater the number of countries that have such attributes, the more stable and sound the global financial system is likely to be.
Moreover, Dudley thinks that more reserve-currency options are good for investors. Having more countries achieve the stature of having a reserve currency would give investors more options and help ensure more liquid capital markets globally, he said. With more reserve currencies available, portfolio diversification opportunities are enhanced, added Dudley.
China waiting in the wings: Well, look out, Dudley, because China is gaining on the greenback. Last year its yuan, or renminbi, currency won informal approval to join the IMFs reserve currency basket known as the SDR, or Special Drawing Right. The yuans expanding reach in cross-trade agreements, along with Chinas massive accumulation of gold, helped Beijing win the approval.
Dudleys perspective might be acceptable from an international standpoint, but remember: He works for Americas central bank, not anyone elses. The U.S. dollar currently is involved in 87% of all foreign exchange transactions around the world, accounts for about 60% of official currency reserves, and is the go-to currency in nearly 60% of all international trade. That amounts to an incredibly exorbitant privilege, as French President Charles de Gaulle once noted. And its apparently a privilege that Fed chieftains like Bill Dudley are prepared to surrender.
My head is still spinning: And at least some of those paying attention to Dudleys speech were taken aback, including Stephen Guilfoyle, managing director at Deep Value Execution Services.
My head is still spinning after New York Fed President William Dudleys comments this morning regarding the U.S. dollars status as the planets leading reserve currency, he said. Yes, I get that with status comes some responsibility (and ticks some people off), but that status allows the Fed to export inflation when needed.There is also no conversion cost when both sides of a trade are in one currency. On top of that, it affords the U.S. the ability to enforce policy without resorting to military means when diplomacy fails. That last one is a big one. Imagine no ability to impose sanctions on the world stage when a Russia or an Iran start doing things that are not in the best interests of world stability.
Call for Dudleys resignation: Guilfoyle added: This is almost unforgivable. Youre not here to defend everyone else; youre here to defend the United States, Bill Dudley. It represents a complete lack of understanding about what is going on in the world and how much of an advantage this is to the United States. Its almost as if hes working for someone else.
The loss of sole reserve currency status for the dollar would mean central banks around the globe liquidating major dollar positions, crashing the dollar on foreign exchange markets and deliveringexplosive price inflation here in the U.S., added Robert Wenzel of the EconomicPolicyJournal.com. Dudley supports this? PresidentObama should call for his immediate resignation.
Prepare now with gold: But thats not going to happen. Instead, we seem to be marching slowly but inexorably toward a new world in which the dollar is no longer the most favored currency. And, indeed, world-reserve status is by no means ever permanent: It was about a century ago that the U.S. dollar displaced the British pound as top dog on the global stage. But the dollars eventual loss of reserve status carries with its some wrenching changes and stiff blows to the American way of life.
With influential policymakers like Dudley pushing for that day to come sooner rather than later, investors might be wise to start hedging for the dollars dethronement with a healthy allocation of gold and silver bullion plus rare coins.