U.S. Federal Reserve Bank Chairman Alan Greenspan has warned that the dollar’s days as the world’s reserve currency may be numbered, and that a trend to replace the dollar has already begun.
Though some have speculated this is an inevitability, these predictions, published September 20 in a German magazine, are particularly shocking considering their source. Greenspan was the central banker responsible for overseeing the dollar’s value for over 18 years up until 2006.
In the interview published in Stern magazine, Greenspan said it was “absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency.”
If the former chairman’s words prove true, the dollar’s present downward slide will continue. Greenspan noted that at the end of 2006, two thirds of all currency reserves were held in dollars, as opposed to 25 percent for the euro. If central banks continue to increase euro proportions at the expense of the dollar, demand for the dollar will fall and excess dollar supplies could start flooding the market.
In fact, this trend is already under way, as evidenced by the recent breakdown in the dollar’s value. In recent months, the dollar has hit all-time lows against the euro and multi-decade lows against many other currencies. The dollar has also reached new lows against oil and wheat, and a 28-year low against gold.
Greenspan also stated that although more countries still use the dollar as a reserve currency, the greenback doesn’t actually have “all that much of an advantage” over the euro any longer. In terms of cross-border trade, the dollar accounts for 43 percent, while the euro is used in 39 percent of such transactions.
The trend to adopt the euro as a reserve currency has greatly benefited Europe. In addition to the prestige and power gained by the European Central Bank, Europe’s economy has also profited. With the euro’s emerging role, Greenspan said Europeans are beginning to experience the benefits that reserve currency status has given Americans—including lower interest rates and higher growth with diminished inflation concerns.
Loss of the dollar’s reserve currency status would be a huge blow to the United States. It would drastically undermine the dollar’s value and cause Americans to lose many unique economic blessings that they have become used to. Economic conditions in the U.S. may be about to radically change.