Europe Seeks Alternative To Dollar Dominance – 70 Year Shift

Monday, July 7, 2014
By Paul Martin

Monday, 7 July 2014

It was a gamble and it may have just backfired. When U.S. regulators last week sought to limit Banque Nationale de Paris’s ability to clear dollars they opened a pandora’s box of uncertainty. Countries globally depend on the dollar for international payments. Many will have taken note and some will be alarmed by the move and will now naturally mull over alternatives.

Today in Brussels the French Finance Minister, Michel Sapin, will start a debate with his EU counterparts on how the European Union can reduce its dependency on the U.S. dollar. Should the discussion find traction it may contribute to the ongoing monumental shift in global monetary economics with the gradual decline of the dollar as the global reserve currency.

Mr Sapin said in an interview with The Financial Times, “We [Europeans] are selling to ourselves in dollars, for instance when we sell planes. Is that necessary? I don’t think so. I think a rebalancing is possible and necessary, not just regarding the euro but also for the big currencies of the emerging countries, which account for more and more of global trade.”

The U.S. dollar has enjoyed reserve currency status for most of the past 70 years. This status confers enormous power to the dollar and allows the U.S. government to fund its trade deficits at very low cost.

Essentially reserve currency status means that most countries around the world and their respective banks will hold dollars (and dollar proxies such as U.S. treasury bonds) as part of their trade requirements.

Globally a massive 87% of all currency transactions have the U.S. dollar on one side, that is to say that most international trading involves buy and selling goods and services through U.S. dollars. Most central banks believe that the U.S. dollar is the only realistic alternative for such trade as the market is very liquid and has always been considered very safe.

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