The mighty greenback is slowly but surely losing its pre-eminence as the world's reserve currency. Consider the evidence:
1. The US dollar has fallen by more than 10 per cent against the euro and 14 per cent against the pound this year.
2. Asian central banks have been steadily diversifying their holdings away from USD-denominated assets into the euro, yen and pound.
4. Today's Financial Times reports that Euro notes have overtaken the dollar:
The US dollar bill’s standing as the world’s favourite form of cash is being usurped by the five-year-old euro. The value of euro notes in circulation is this month likely to exceed the value of circulating dollar notes, according to calculations by the Financial Times. Converted at Wednesday’s exchange rates, the euro took the lead in October.
The figures highlight the remarkable growth in euro notes since their launch on January 1 2002, three years after the start of Europe’s monetary union, which in January welcomes its 13th member – Slovenia, the former Yugoslav republic.
“After the launch, we expected growth to stabilise – but it has continued over five years,” Antti Heinonen, head of the European Central Bank’s bank notes directorate, told the Financial Times.
Although the ECB does not deliberately promote the international use of the euro, it has become popular in official foreign exchange reserves – even if it is far from challenging the dollar’s lead as the most popular reserve currency.
Individually, these might be dismissed. Together, they point to a gradual erosion of the greenback's long standing dominance of global currency markets and central bank reserves.
I don't see this gradual diversification as a problem for markets - though there will be the odd exchange rate and asset class dislocation as large holdings shift. Nor does it augur the greenback's imminent collapse; more like a gradual weakening.
In time I expect it will be the yuan - rather than the euro - which comes to rival the dollar as the world's most traded currency (though clearly we are still a long way from that).
UPDATE: Felix Salmon of Economonitor offers five main reasons why there are more euros in circulation than greeenbacks. Meanwhile Dean Baker has this to say:
First, the dollar is not essential to world finance. People are happy to hold euros and other currencies, no one needs to hold dollars. Second, the euro passing the dollar is not some sort of cataclysmic event.
As long as people still have faith in the basic soundness of the dollar, they will be happy to hold it, even if it slides to number 2 by some measures. Of course, if investors become convinced that the currency is on a downward path, then it could lead to a serious run.
In short, the world does not need the dollar, but it is also not anxious to throw it in the toilet, or at least not yet.