Attempts to move away from the US dollar as the currency reserve is ‘fraught with danger' said Paul Chappell, chief investment officer at currency manager C-View.
Speaking to attendees at the Global Pensions Currency Management Focus 2011 on 26 May in London, he said moving away from the dollar would be difficult to do as the alternative would likely be the special drawing rights (SDR) basket.
However, SDRs currently only represent a small number of currencies – the euro, Japanese yen, sterling and US dollar – and would have to be reconstituted to include more developing economies to accurately represent global growth.
“Almost inevitably any agreement about moving away from the dollar would likely incorporate the inclusion of a number of ... G7 and G20 currencies. And the effect of that would be, particularly with some of the developing countries, that the countries generally around the world would increase their reserves in those currencies,” said Chappell.
He added: “Effectively, the value of those currencies would likely rise as people shuffled their reserves between the dollar and those currencies. So the very thing that a number of the BRIC countries complain about, particularly Brazil, about currency strength, if they move away from the dollar reserve currency the likely initial impact will be a rapid strengthening of their currency, which is about the last thing they want to see happening.
“So we don’t have a solution for this, but we do know that attempts to move away from the dollar as the reserve currency are fraught with danger and extremely difficult to do.”
Separately, he said investors have been moving into the Swiss franc as a safe haven currency as Switzerland has emerged as one of the developed countries that “has its fiscal situation in order”.
He said this is likely to continue in the foreseeable future as concerns abound around the state of the eurozone, the US’ debt position and the UK’s cost cutting measures.
Other investors are flowing into the currencies of commodities-based countries like Australia, New Zealand and South Africa, mimicking the speculative investments flowing into the commodities sector, he told attendees.
He described the move as dangerous because it’s based on the assumption developing countries like China or those in Latin America will continue to grow at a similar pace as they have been.
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