International Currency Competition: Are There Alternatives to the US Dollar?

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Policy Brief Series Issue 3, Nov 2011

International Currency Competition: Are There Alternatives to the US Dollar? Ramkishen S. Rajan and Sasidaran Gopalan1

Key Points • The US dollar has remained a centrepiece of the international monetary system due to a lack of credible substitutes. • The downgrade of US debt by Standard and Poor’s in August 2011 has further fuelled speculation of the demise of the dollar as the undisputed global reserve currency. • This brief argues that despite persistent structural weaknesses in the US, the lack of credible alternatives, coupled with the significant depth of the US financial markets, is likely to result in preserving the ‘exorbitant privilege’ of the dollar in the near future. • However, over time, the international monetary system will witness the gradual rise of other international currencies such as the Chinese renminbi. Asian central banks and sovereign funds with an abundance of external assets should actively support the development of such alternatives.

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Ramkishen Rajan is currently a Visiting Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore and Professor of International Economic Policy and Public Policy, George Mason University, USA. E-mail: rrajan1@gmu.edu. Sasidaran Gopalan is a Research Scholar at the School of Public Policy, George Mason University, USA. E-mail: sasi.daran@gmail.com. All errors are our own.


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