A World of Multiple Reserve Currencies

Some worry about the stability of this world of multiple international currencies.

WASHINGTON, DC I share the growing concern around the world about the misalignment of currencies.

SANTIAGO With the currencies of Malaysia, Indonesia, South Africa, Turkey, Brazil, Colombia, Chile, and Mexico hitting record lows recently, currency traders around the world are asking How much further can emerging market currencies weaken?

Exchange of currencies

Little did the world know then, economies would collapse, currencies would become worthless, elections would be stolen, regimes would fall.

First, President François Hollande, worried about the euro s appreciation against other major world currencies, called for an exchange rate target.

Ideally, Asian currencies would rise much more than 15 while European currencies would rise less.

Moreover, some emerging market currencies are joining the club of international currencies for the first time.

Some countries devalued their currencies.

Wanted Chinese Leadership on Currencies

If the dollar continues to decline, it will exacerbate the situation, reducing world oil supply and increasing demand in countries with appreciating currencies.

The British economist Walter Bagehot replied at the time that there would probably be two competing world currencies, which he termed Latin and Teutonic.

That is also true of currencies.

Just as the US now has to share the world stage with other economies, the dollar will have to make room for other international currencies.

Efficiency dictates the use of fewer and larger currencies (and foreign investors, understandably wary of weak and volatile currencies, demand it).

Tensions are rising over currencies as well.

But that's just part of the story. You have a similar trend with currencies currencies going through an extreme time of stability.

This is particularly true with respect to lending in foreign currencies to economic agents that do not have revenues in those currencies.

However, some claims were presented in other currencies, and some others were presented in United States dollars after conversion from other currencies.

depreciation of nonconvertible currencies. In 2004, the amount written off plus the adjustment for overvaluation of cash held in nonconvertible currencies totalled 2.7 million.

Moreover, the eurozone itself is a mini gold standard, with heavily indebted members unable to devalue their currencies, because they have no currencies to devalue.

So products were developed that allowed investors to borrow easily in several currencies at once and invest in a portfolio of high interest rate currencies.

To be sure, all three currencies have their critics.

Since then, most emerging market currencies have rebounded sharply.

Given that the renminbi s real and expected rates of return are higher than the real rate of return of other currencies, it has become a positive carry against foreign currencies, reinforcing the tendency to hold assets in renminbi and liabilities in foreign currencies.

Perhaps when we have one world government, it will make sense to have one world currency. But, even setting aside the equilibrating benefits of flexible currencies, the prospect of a single, omnipotent central bank is not particularly appealing.

And floating and fixed exchange rate regimes coexist uneasily, because volatility tends to affect the floating currencies (often the euro, and recently the Latin American currencies).

Will exchange rates between the major currencies be dangerously unstable? Will those responsible for managing central bank reserves, seeking to maximize returns, shift erratically between those currencies?

Prohibition of certain transactions for prudential reasons also makes sense, particularly for borrowing in foreign currencies by economic agents that do not have revenues in those currencies.

The regular resources cash balance at the end of 2004 was 329 million, consisting of 318 million in convertible currencies and 11 million in non convertible currencies.

Currencies fell, interest rates rose, and credit default swaps soared.

In order for some currencies to depreciate, others must appreciate.

Table 5 Non convertible currencies held at 31 December 2004

The intellectual father of the euro, Columbia University s Robert Mundell, once famously opined that the optimal number of currencies in the world is an odd number, preferably less than three.

They can be used only by converting them into one of four currencies, at which point they begin to carry interest at those currencies combined treasury bill rate.

True, all countries in the world cannot simultaneously undervalue their currencies. But poor nations could have shifted the burden onto rich countries, where, economic logic suggests, it ought to be placed.

Such coordination could begin by linking the various currencies in the region in a common bloc, floating vis à vis the rest of the world. The linkage would achieve two objectives.

However, for expenses incurred in specific currencies as determined by the International Civil Service Commission, the maximum amounts mentioned in all paragraphs below shall be established in those currencies.

In fact, this will happen whatever the exchange rate between currencies.

Countries running surpluses must adopt expansionary policies and appreciate their currencies.

One after another, they abandoned the gold standard, depreciating their currencies.

The amount fluctuates as many frozen accounts are in other currencies.

After all, we live in a global system in which different countries use different currencies, which implies that residents and non residents have asymmetric demands for assets issued in those currencies.

Apart from China, central banks don t intervene to protect their currencies anymore.