They say a picture is worth a thousand words. Here’s the latest picture, derived from the IMF’s Currency Composition of Official Foreign Exchange Reserves database:The dollar was supposed to be doomed by the might of a single European currency, but the developing world’s central bankers are backing away. They have shed €45 billion from their holdings in 2012, continuing a trend that started in 2011.The FT has done the spadework, interviewing the currency watchers:
“It’ll be the number two international currency but I wouldn’t say there are any prospects of it challenging the dollar,” said Jeffrey Frankel, professor of economics at Harvard’s Kennedy School of Government. […]“The degree of integration across European financial markets has taken a step back,” Mr Frankel said. “That is the dimension on which the euro has lost ground in international currency status.”The euro may regain its allure if Europe moves towards fiscal union and a single sovereign bond market. But its moment may have passed as big shifts in the global economy boost new emerging market currencies that will challenge both the euro and the dollar.“The effects of the euro crisis will linger, growth will be slow, interest rates will remain low, and the general attractiveness of euro assets low,” said Edwin Truman, senior fellow at the Peterson Institute think-tank in Washington. “The dollar is holding its own for now, and we are moving towards a multicurrency system.”
That all sounds right to us. Europe’s sovereign debt crisis is anything but over. Southern countries are sputtering under imposed austerity even as Germany and the north demand ever harsher concessions for the next round of bailouts. How this breaks is anybody’s guess, but a recipe for growth this is not. The Eurozone as it’s now configured does not augur a bright future for the countries in its fetters. If and when the Europeans get their acts together, we’re likely to be living in a very different world.