Wednesday, March 2, 2011

More reporting on reserve currencies

I believe that over the next 10 years, we're going to see a profound shift toward a world in which several currencies compete for dominance.

The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar. Time posting about Eichengreen

Liquid currencies come from transparent trading systems. The transaction costs of measuring liquidity over the holding period have gone to zero. So the robots can always find the appropriate portfolio of currencies to hold at any gven time.  The change is not profound, but rather marginal since the US currency still dominate the trading patterns due to size. It does cause some layoffs in currency traders.

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