Currencies | Apr 02 2009
By Chris Shaw
Leading into this weekend’s G20 meetings in London much talk has centred on comments made by the Chinese and the Russians regarding the position of the US dollar as the global reserve currency and whether or not this should remain the case.
Shaun Osborne, chief currency strategist at TD Securities, doesn’t see the greenback’s position being challenged anytime soon as there are simply no viable alternatives around. Osborne views a speculated move to lift the status of the International Monetary Fund’s Special Drawing Rights (SDR) not realistic at present.
The SDR is simply an index of the four major reserve currencies – the US dollar with a 44% weighting, the euro at 34% and the Japanese yen and the UK pound at 11% each. As Osborne points out, the problem in trying to adopt it as any form of reserve currency is there are no investable assets denominated in SDRs, so central banks would need to continue to hold the underlying currencies.
As well, Osborne suggests the current weightings of currencies in the SDR don’t really provide any greater protection against forex market volatility because most central bank reserves globally are held in US dollars so any move to adopt SDR weightings would put the dollar under pressure and so reduce the value of these reserves overall.
The other issue is the move would cause an increase in weightings of the yen compared to other major currencies and as Osborne expects this currency will underperform the US dollar in the medium-term such a move makes little sense. Rather, he suggests the more important question is whether such high levels of currency reserves held by the likes of China are in fact necessary as there is the possibility the money could better be used in the domestic economy.
Given the lack of any realistic alternative TD Securities expects the US dollar will remain the global reserve currency by default, but this doesn’t change its view the greenback is likely to come under additional pressure, particularly against the euro.
With this in mind the group is suggesting going long the euro against the greenback at current levels, with scope to add to the position on either a dip to the 1.2950 range or a break above 1.35. The euro is preferred to the Canadian dollar in terms of a play against the US dollar at present as in the group’s view a breakout from the current zone around 1.30 against the US currency is unlikely given the weak state of the Canadian economy.
For the Australian and New Zealand dollars the group sees some risk of further adjustments in domestic monetary policy, with additional interest rate cuts expected in both countries in coming weeks. Both currencies are seeing some support on the crosses and this is the case in particular for the Aussie/yen cross which is near key medium-term resistance at 70.45.
This level should prove a key one both for the currency and for global risk appetite in TD Securities’ view, so what happens from here will potentially be of pivotal importance for both the currency’s short-term direction and the direction of asset prices.
