Published October 10, 2008

US dollar seen losing status as single reserve currency

JPMorgan Chase expects commodity currencies to remain highly volatile

By LYNETTE KHOO

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THE weakening greenback is changing the way countries hold their foreign reserves as they move away from holding US-denominated foreign reserves to a mix of reserve currencies, audience at the Discover Europe 2008 panel discussion was told.

Over the next two decades, foreign reserves would no longer be dominated by one single reserve currency but three to four foreign reserve currencies, of which two would be Asian currencies, Klaus Regling, senior adviser with the European Commission, said at the event yesterday, held at the National University of Singapore.

But that does not mean that these countries will totally decouple from the US economy, he added.

'It means that other economies will be less dependent on the United States but it does not mean they will be immune or decouple from the US,' Mr Regling said. 'The US, which now has a share of one-quarter of the world's GDP, will continue to have a very high share.'

The US financial and economic fallout is eroding the dollar as a store of value.

JPMorgan Chase head of Asia forex research Claudio Piron noted that China and India have been trimming their US dollar-peg link.

The US dollar peg, which stood at 100 per cent in 2000 for both Chinese yuan and Indian rupee, now stands at 90 per cent as a proportion of currency basket peg, he said.

Though euro has achieved much monetary stability and grown in its role as a reserve currency, it is unlikely to become the next single dominant reserve currency, Mr Regling said, citing incumbency advantages and inertia that favour the continued use of the US dollar.

According to Deutsche Bank Research, the euro/US dollar segment was the most frequently traded currency pair accounting for 28 per cent of the global forex turnover in 2007. Over 47 per cent of initial offerings of international bonds were issued in euro compared with just 35 per cent in US dollar in 2007.

But so far, the euro and Asian currencies have weakened as the financial crisis brewed in the US and Europe, threatening to deepen further.

Mr Piron said he expects the US dollar to remain firm for the next three to six months until the financial crisis is over. He is 'neutral' to 'slightly underweight' on Asian currencies in the short term.

'At the moment, cyclically Asian currencies will probably be weak for the next two quarters but we certainly expect currencies to appreciate a bit in the second half of next year,' he added.

He also expects commodity currencies to remain highly volatile as commodity prices stay corrected during the economic downturn, and advises that investors stay on the sidelines.