Currency Wars: Will the dollar, euro, yen or yuan prevail in 2012?


The dollar has been used as the reserve currency for years. However, with the latest yen-yuan currency accord, there has been industry speculation over the future and the role of the dollar.

Following Japan and China’s currency and trade pact, several commentaries have surfaced analyzing the currency outlook for 2012.

In an editorial piece, China-Japan Currency Deal Points Way to a New World Monetary Order, Bloomberg argues that while the “immediate practical significance is limited, yet the deal signals that a deeper transformation is under way -- and one that the world should welcome.”

Related: Japan and China Agree On Currency Pact, U.S. Criticises The Currencies

In particular, the Bloomberg team holds the view that pact will help nudge the yuan towards its “inevitable status as a global reserve currency alongside the dollar, yen and euro.”

They wrote:

When the dollar loses its pre-eminence as a global currency, the U.S. will need to adjust. Dollar bills in circulation are, in effect, a gift to the U.S. -- they cost cents to print yet they buy a dollar’s worth of goods and services, a hidden form of payment that economists call seigniorage. A stronger yuan will transfer some of this seigniorage to China.

(cont.) A grown-up yuan means a more stable world economy, which would hugely benefit the U.S. In any case, China’s size and vitality assure both its geopolitical strength and the yuan’s eventual standing as a global currency. Resistance is pointless.

On the other hand, MarketWatch’s editor-in-chief, believes “2012 to be the year of the dollar,” arguing that currency wars favour the greenback.

While David Callaway doesn’t touch on the yuan and yen, he predicts the death of the euro, adding that “the idea of the euro’s emergence from the crisis as a strong reserve currency is now indefensibly out the window.”

Callaway wrote:

What we are witnessing is instead a trend shift back into U.S. dollars as investors look out on the 2012 investment horizon and see no other credible global story out there to put their money on. While the crisis in Europe and China’s slowdown might hold the U.S. economic recovery back or even pull the U.S. economy back into recession next year, the data at the moment suggest it’s the U.S. that will pull everybody out of the economic abyss this time, whenever it happens. Bullish for the dollar.

What is your currency outlook for 2012? Tell us below.

Further Reading: The Endgame For The Eurozone Has Begun: Nouriel Roubini

Further Reading: Europe’s Currency Conundrum – What Can Save The Euro Now? : Joseph Stiglitz

Further Reading: The Almighty Dollar – Are We Entering A Post-USD World? : Sanjeev Sanyal