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Dollar's Days As World Leader Are Numbered, Says The World Bank

Because so much of today's economic growth, and future growth as far as the eye can see, is coming out of the emerging markets, The World Bank tells us that the dollar's days as the world currency are numbered. Their forecast is that the global currency markets will be dominated by the Chinese yuan, the euro and U.S. dollar, and as soon as 2025 -- and there seems to be some doubt about the euro.

We've heard similar predictions of the dollar falling from first place for a while, but considering the source, this message is different. The World Bank has been around since 1944, lending funds contributed by the advanced countries to developing economies, which in the early days I suppose included names such as South Korea, Italy and Japan. This time the dollar's impotence is not coming from a big investor trying to make a point in currency trading, but rather an agency that represents the U.S. as much as it does the emerging markets.

U.S. companies make a big deal of how much they are selling to emerging market companies. But those customers are not simply buying things; they also are expanding their abilities to create them on their own. Between today and 2025, the emerging market economies will grow at close to five percent per year, while the sclerotic developed nations will come in around half that. Here are some other data points The World Bank wants us to know about:

  • Countries called emerging today will account for more than half of global economic growth by 2025
  • Of the 1,000 companies spending the most on research and development in 2009, 12 percent were in the emerging markets.
  • Of the 2,400 cross-border mergers and acquisitions initiated by emerging market companies, more than half were "south-north" transactions, that is, acquisitions of developed market targets.
Building bond markets and international banking systems that can be relied on are not simple tasks, and will take a while. But who can blame the emerging market companies and monetary authorities for wanting to be able to make and receive payments, and borrow capital for long periods, in their own currencies which as growing economic powers they can be responsible for, rather than have to rely on the U.S. dollar? Here's a chart of the dollar against major currencies over the last 10 years:

Down, down, down, except during the credit crisis. That's fine if you are paying with dollars, and your currency is appreciating but not so good if you are receiving them.

One last point: The World Bank seems only half-hearted in its endorsement of the euro as a global currency to go toe-to-toe with the greenback. Their report nominates the euro with a big "if:"

At present, the euro is the most credible of those alternatives. Its status is poised to expand, provided the euro area can successfully overcome the sovereign debt crises currently faced by several of its member countries and can avoid the moral hazard problems associated with bailouts of countries within the European Union.
In the past two weeks, as the markets have focused on the latest installment of the European debt crisis, the euro is down four percent against the dollar. That's just the kind of instability that will make the emerging markets want to run their own monetary show.
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