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| Chris J Ratcliffe Bank of England governor Mark Carney has suggested that a virtual currency could one day replace the dollar as king of the foreign exchange market |
Bank of England governor Mark Carney has suggested that a virtual currency, modelled on Facebook's Libra, could one day replace the dollar as king of the foreign exchange market.
The BoE
chief aired vague proposals for a so-called "Synthetic Hegemonic
Currency" at the recent Jackson Hole Symposium of central bankers.
Here is a
brief assessment of why the greenback is losing its lustre and the outlook for
Carney's proposed new digital currency, which would be supported by major
central banks around the world.
Why
dollar dominance?
The dollar
has been the world's reference currency since the Bretton Woods agreement in
1944, when various key units were fixed to the value of the greenback. It has
retained its global supremacy ever since, thanks to the economic and political
clout of the United States.
"The
dominant currency is always that of the world's biggest political power,"
noted Philippe Waechter, head of research at Ostrum Asset Management.
The dollar
accounted for almost 62 percent of global foreign exchange reserves in the
first quarter of 2019, according to the International Monetary Fund.
The
European single currency was second with 20.2 percent, while China's yuan
comprised only two percent despite the country's rise to the rank of the
world's second biggest economy behind the US.
Why is
greenback losing appeal?
Although
the dollar has lost its sparkle owing to globalisation and the changing world
economic order, gyrations in the US unit still impact economies elsewhere.
"US
developments have significant spillovers onto both the trade performance and
the financial conditions of countries even with relatively limited direct
exposure to the US economy," Carney said at the recent bankers' meet in
Wyoming.
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| Alastair Pike Don't expect the US to let its currency dwindle without a fight |
When the greenback appreciates, so do repayments for many emerging nations because their debts tend to be denominated in dollars.
The BoE
chief, who steps down in January, added: "In the longer term, we need to
change the game."
Central
bank role?
The public
sector, in the form of central banks, could instead provide the best support
for a new virtual currency, according to Carney.
"It is
an open question whether such a new (cryptocurrency) would be best provided by
the public sector, perhaps through a network of central bank digital
currencies," he said.
Yet central
bankers and world leaders alike remain anxious over the current crop of virtual
currencies because they are unregulated.
US
President Donald Trump himself has lashed out at Bitcoin and Libra for being
"based on thin air" and having no standing or dependability -- unlike
the dollar.
Commentators
believe Washington is unlikely to allow the greenback to lose its cherished
status as the world's premier reserve currency.
"The
United States will simply not allow it to happen without a fight. Nobody in its
position would," said Rabobank analysts.
What
about Libra?
The BoE
governor meanwhile made explicit references to Libra -- a future cryptocurrency
unveiled by social media giant Facebook in June.
Carney
avoided all mention of Bitcoin, which is the world's most popular digital unit
but has been plagued by volatility.
Libra,
which aims to launch in the first half of 2020, will be backed by a basket of
currency assets to avoid the wild swings of bitcoin and other cryptocurrencies.
Yet Libra
has also attracted the ire of central bankers owing to its origin in the
private sector.
"Central
banks are a little annoyed by this (Facebook) bid to privatise currency,"
said Agnes Benassy-Quere, a researcher at the Paris School of Economics.
Whereas
Bitcoin is decentralised, Libra will be co-managed by 100 partner firms
including Facebook itself.
Official world foreign exchange reserves, divided by currency, converted to US dollars, in the first quarter of 2019 @AFPgraphics pic.twitter.com/B73vkAA4Ec— AFP news agency (@AFP) 1 september 2019
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