On the Forex Front

A few days ago, Mish took on some of the views of the US bond market – and by extension ways the currency market as well. Part of the discussion relates to some of the stuff I’ve written here in the past, most recently in Interest Rates Due for a Breather Before the Taper, but goes a bit more into the perspective of foreign central banks in all of this. In doing so, Mish takes on the idea that if/when the Fed stops buying Treasury paper there won’t be any buyers.

This gets into the functioning of global trade. If the US is operating at a deficit of trade, which is the case, then it means there is a surplus of USD in the global system being held by those countries running a trade surplus. Those USD have to go somewhere, and invariably that’s into US Treasuries. As Mish notes, the argument gets made that those surplus countries like China can/should invest the dollars into hard commodities, but that has negative implications in terms of the strength of their currency (buying Treasuries means not selling their USD, thus weakening the dollar) and in stockpiling stuff they don’t necessarily need at potentially inflated prices.

I will add another argument to the case.

The Fed does Q.E. by purchasing Treasuries in the open market. Who do they buy from? Holders of Treasuries, meaning those who have previously bought them either in the market or from the Treasury at auction. In other words, there was already a group of buyers of Treasuries in the market before the Fed came in to buy them. The Fed can be looked at as just another big portfolio manager in the market. Will there be an effect on rates when they slow/slop their purchases? Of course. Just as there would be if PIMCO and its massive capital base got out of the market.

The interesting aspect in the situation looking forward is what will happen in terms of Treasury issuance. If the economy continues to positively progress it will mean improved tax revenues, and thus a lower federal deficit. If Congress is able to also meaningfully reduce the expense side of things (the bigger ask of the two), that will accelerate the deficit reduction process and further reduce the need for the Treasury to issue paper. That reduced supply will have an offsetting impact on the Fed cutting back on its purchases, which no doubt is part of the thinking of Bernanke (and his successor) & Co.

Bringing it back to the currency question, as Mish notes in his piece, one of the common claims by the loudest voices in the interest rate prognostication debate is that reduced Fed buying will negatively impact the dollar. This is said to be the result of no one wanting to hold depreciating bonds and because all the money in the economy will produce inflation-driven greenback devaluation.

The first part of that equation assumes the buyers/holders of Treasuries care about intermediate fluctuations in valuation. This is also something voiced in terms of the impact rising rates will have on the Fed’s balance sheet (which I discussed before in Prospects for More Upside in Interest Rates). I don’t abide by that argument and neither does Mish.

The second part of the equation, as I’ve noted before in different contexts, fails to take into account the other side of the exchange rate. The USD is valued in terms of other currencies. If that currency is equally at risk and/or exposed to the same factors said to put the dollar at risk of devaluation, then the greenback will not lose ground. In fact, the current situation sees many of the other major economies fairing worse than the US. This is far from a recipe for the type of rapid depreciation in the dollar some folks expect.

It’s always reassuring when an industry leader releases information shedding positive light on the future of an alternative investment. Today, it was derivatives marketplace Chicago Mercantile Exchange, or CME Group, discussing the promising outlook of foreign currency futures.

Since the CME is arguably the biggest futures exchange out there, is it any surprise they’re touting FX futures contracts? No, not really, but the whole concept of currency futures is still pretty interesting nonetheless. I decided this fit as a nice follow-up to a post I wrote the other day on managed futures and risk mitigation in general, since these particular investments can get a little complex.

For anyone who’s unfamiliar with them, currency futures allow investors to exchange one currency for another on a future date at a specified price that is set at the time of the agreement.  This allows investors the ability to make a purchase that will be executed sometime in the future for the price it would cost them today. In turn, they’re granted protection against exchange rate fluctuations, which could end up working for or against them depending on where the currency pair moves.

Derek Sammann, global head of foreign exchange and interest rates at CME Group, explains how, due to rapid economic globalization, cross-boarder asset flows show no sign of slowing down anytime soon. This provides both a growing opportunity for potential prosperity, as well as risk, for investors interested in tapping the $4 trillion a day foreign currency market.

As Forex continues to become a more mainstream alternative investment option, the need for a supplementary vehicle for hedging risk will inevitably rise. Currency futures are just one avenue investors can take to fill that need. Others come in the form of continuously developing advanced software controls within the realm of spot Forex trading. As various up and coming forms of alternative investments popularize, it is interesting to note what types of risk controls they will inspire and bring with them.

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

India has been viewed as a tiger economy – rather than a lumbering elephant – ever since it embraced outward-looking, market-friendly policies in 1991.  Income-per-capita has increased from just $300 three decades ago to $1,700 today, and the economy has not experienced a single year of contraction since the Iranian oil shock and a bad monsoon struck in 1979.

A poor growth mix in recent years however, has undermined the sub-continent’s status as emerging-market darling.  Persistently large fiscal deficits, a deteriorating external position, and stubbornly high inflation have led to a change in concerns over India’s ability to sustain its high-growth performance to whether it can simply maintain overall stability.  Corrective measures are required urgently if the country wishes to avoid a return to the status of lumbering elephant.

The Indian economy endured centuries of sub-par performance until recently.  Indeed, income per capita stagnated for almost 350 years following the arrival of the British at Madras in 1602.  The economy fared little better in the decades that immediately followed independence in 1947, as the subcontinent withdrew into autarky and socialism.

Economic growth averaged 3.5 per cent a year – the so-called ‘Hindu’ rate of growth – from the late-1940s through the 1970s, or roughly half the rate achieved by Asian tigers with outward-looking, market-friendly policies.  The economy’s performance was particularly disappointing over this period, given that the population grew at 2.2 per cent a year.  Indeed, the modest annual increase in income-per-capita meant that India made little headway in reducing mass poverty.

The first efforts to dismantle socialism and reform the domestic economy were introduced following the election of the Janata Party in 1977, and further economic liberalisation took place in the 1980s under Prime Ministers Indira Gandhi and Rajiv Gandhi.  The reforms alongside profligate public spending helped to accelerate the rate of GDP growth to 5.5 per cent in the 1980s, but the expansion was based on unsustainable borrowing, and a crisis erupted in 1991 when the country ran out of foreign exchange.

The foreign exchange crisis induced India to abandon its inward-looking policies and embrace the economic reforms recommended by the International Monetary Fund (IMF).  The new direction was not without its critics, and opposition parties argued that the new policies would result in a ‘lost decade’ of economic growth, as had been seen in other lesser-developed countries that supposedly adopted the IMF-model in the 1980s.  The critics vowed that they would reverse the reforms when they came to power.

The pessimism proved misplaced, as the country’s finances were restored within two years of the reforms, and the annual rate of GDP increase accelerated to a new record of 7.5 per cent from 1994 to 1997.  The outward-looking, market-friendly policies proved too successful to be reversed, and reform continued even when other political combinations came to power.

The Indian economy has continued to move forward at a robust pace, and weathered numerous tests of its resilience relatively well.  Economic growth slipped to 5.5 per cent a year from 1997 to 2002, a favourable outcome given that the Asian financial crisis, two severe droughts, and a global recession all struck over this period.

The economy’s performance improved sharply after 2003, and annual growth accelerated sharply to an average of almost 9.5 per cent in the three years that preceded the global financial crisis.  The ‘Great Recession’ took its toll on the economy, but growth was still almost seven per cent in 2008, and rapidly recovered to an average of more than eight per cent a year in 2009 and 2010.

The recent growth performance however, was propped up by unsustainable aggregate demand policies.  The overall fiscal deficit has averaged close to ten per cent of GDP over the past three years, and the budget released in February does not display any serious ambition to restrain public spending.  The government’s profligacy has been driven primarily by populist spending policies, and with national elections due by 2014, next year’s budget is unlikely to be much better.

The public debt-to-GDP ratio is already close to 70 per cent or 30 percentage points higher than similarly-rated sovereigns, and further increases in the ratio are virtually certain to lead to rating downgrades.  Further, current fiscal policy has contributed to a widening current account deficit and rising net external indebtedness.

The level of net external debt to GDP is already above ten per cent or three times greater than similarly-rated peers, and the more than ten per cent drop in foreign exchange reserves since last autumn limits its ability to absorb sustained capital outflows.

The profligate public spending policies helped push the rate of headline inflation up to the eight-to-ten per cent range over the past two years, and though the inflation rate has since decelerated to seven per cent, it remains above the central bank’s comfort zone.  The stubbornly high rate combined with a sharp drop in the Rupee, limits the central bank’s ability to stimulate the economy, which has seen its quarterly growth rate plunge to the lowest level in seven years.

India is rapidly losing its lure as emerging market darling.  Persistently large fiscal deficits, a deteriorating external position, and stubbornly high inflation have seen foreign investors look elsewhere for growth opportunities.  The lumbering elephant stands at a crossroads.

www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

This month, we were very excited to learn that Currensee would be featured in the magazine Alternative Latin Investor. This bimonthly publication covers the alternative investing industry in the Latin American region. The Latin American (LatAm) markets are among the fastest growing areas for the industry globally.

What was most interesting about the piece was the perspective put on Currensee, as it was being observed through the eyes of the LatAm investment industry.

Titled “Currensee: The Next Step in Forex Trading,” the article began by explaining a few aspects of foreign currency trading that are alluring to the LatAm investing industry. Characteristics like the massive size and liquidity of the world currency market, the speed and flexibility in which transactions can be executed, and being aware of the potential to generate returns during times of volatility are all attracting LatAm investors to Forex.

The ALI’s article discusses two aspects of this program have been particularly appealing to LatAm investors: transparency and diversification.

Because Currensee began as a social network for Forex traders to collaborate, communication has always been an integral component of how Currensee operates. Though today the focus has shifted more towards the Trade Leaders program, communication is still there and it equates to a high level of transparency.

“What’s unique is that our customers can give one another permission to view their actual trading activity and performance… There’s a level of transparency beyond any alternative investment I know of,” says Currensee CEO Dave Lemont.

LatAm investors are also drawn to the program’s ability to achieve “double diversification.” What this means is that as an investor in the Trade Leaders Investment Program, investors benefit from asset class diversification in the Forex market as well as diversification in their individual accounts by choosing from a variety of Trade Leaders. This new method of diversifying is an exciting development for the world of investing.

The article drives home the points around diversification for all investors and the proof is in the numbers – the fact that from 2000-2010, the S&P 500 has dropped a cumulative 3.7%. That means if you’re one of the many who had been adhering strictly to the general 60% stocks/40% bonds rule of thumb, you ultimately lost out.

Lemont says: “The stock market is manipulated by big players and algorithmic traders on a daily basis. The foreign currency market is so much bigger: US$4 trillion a day, with 24-hour trading. We’re not going to get together and move the euro today. But we could get together and move the price of a small-cap stock.”

So although collaborating and trying to move the euro is not likely something investors can achieve, keeping a diversified portfolio is. Keep cool and keep it diversified.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

With the International Traders Conference just over three weeks away, we thought it would be a good idea to offer anyone wanting to deepen their Forex trading knowledge a look at what goes on within the conference. The ITC is an event hosted by FXstreet.com, one of the world’s top 10 currency trading portals offering information to help traders achieve success in Forex investing. Since the conference is purely educational, FXstreet.com’s focus was directed primarily into seeking out six of the best industry professionals to help attendees become better traders. For three days, guests will be able to partake in a series of talks and interactive live trading sessions with the speakers, as well as connect with others who share the same interests as them.

What makes this event so special is its vivacious, warm, and social atmosphere. Since there is a maximum of 70 attendees each year, the event remains very personal, allowing guests to work closely with the speakers. For three hours each day, they will be able to engage in live trading sessions with each of the six speakers where they will get to follow along with their trading on their own computers and even partake in a few trades themselves.

Below are some photos taken at the last ITC, which took place in 2010:

Attendees listen attentively during Triffany Hammon’s live trading session.

A beautiful lunch waiting to be enjoyed at the Comedor.

Todd Gordon’s group during a live trading session.

Chris Capre's group partaking in a live trading session.

Some of the 2010 ITC attendees listening to a speech.

Forex industry professionals and ITC speakers Boris Schlossberg and Todd Gordon.

Attendees enjoying the delicious farewell reception spread.

The event was enjoyed by all in attendance!

Noemí, Content Director at FXstreet.com, was able to get a Skype interview with professional Forex trader and educator Rob Booker! Here, he provides insight on what the ITC is really about ---> Rob Booker Interview.

Having the opportunity to interact with others who are passionate about improving their Forex trading skills is what makes the ITC such a unique event. Here is what a four-year attendee from Greece had to say about the conference:

"I have participated to the ITC from the first venue up to the most recent. This says a lot about my liking for a venue like that. I have no relationship whatsoever with the organizers so the decision to come from my country and attend was merely based on the merits that I receive towards my strive to become a better trader. The atmosphere, the organizers and the speakers have always been exceptional.
I went the first year and then thought that I might not go again cause I had a lot of information to digest. But likely each year has been so different, especially  the info that you can implement to your trading.
For me the motivational aspect of the ITC is the biggest  bonus as you get to meet with very interesting people and exchange ideas and cultures from all over the world!!
The way the ITC is organized  is unique on how you learn,  interact,  meet  and talk to speakers. All the concepts covered are immediately analyzed and applied during the live trading sessions."

Yannis Rigos – ITC ‘07, ‘08, ‘09 and ‘10 attendee (Greece)

To learn more about the ITC 2012 which takes place in Barcelona, Spain, visit their website here. (To receive a discount of $190 USD/150€, add coupon code: mp_currensee)

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

2 Comments

When you think of the foreign currency market, what do you think of? Perhaps world economies exchanging money from one currency to another. Maybe large institutions making decisions that affect millions of stockholders or account owners.

But did you think about you you’re invested in the world currency market even if the scenarios above are not in your control?

The reality is that we’re all invested in the currency market in one way or another. The money in your pocket and your checking account gives you exposure to the value of your domestic currency (dollars, euros, pounds, yen, etc.). Granted, when it comes to money that you are likely to be spending in the short term on goods and services priced in the same currency it’s not really much exposure. But, for your bigger assets and holdings, it can be a different story.

Let’s take something like your retirement savings or pension plan. You will spend that in the future, potentially at a time when the value of the currency is lower. We’re not just talking about inflation here (though that’s a legitimate concern). We’re also talking about the currency’s value in terms of the currencies of its major trade partners.

That value influences the cost of the goods you buy which are imported from abroad, not to mention the cost of those trips around the globe you have in mind for your golden years, and that villa in the south of France you’re hoping to purchase.

The currency market also impacts you in other ways. The earnings of companies in your investment portfolio have exchange rate exposures in many cases. These come in two forms. One is exchange rate conversion of overseas income. The other is the impact exchange rates can have on the attractiveness of the company’s products abroad, and the costs of foreign goods and services it consumes.

For that matter, if you work for a multinational company, or one that does business abroad, your very livelihood could have exposure to the currency market. It’s become an increasingly large part of the world in which we live, work, and invest today.

It’s also one you can take advantage of in your investing plans.

The foreign exchange (Forex) market is a 24-hour per day, five day per week market (and even weekends in some cases) where people come together to swap currencies. If you’ve ever traveled abroad you have participated in the Forex market by exchanging your home currency for that of your destination.

So, is investing in Forex the right investment strategy for you? Consider the following:

-       With $4 trillion in daily trades, it’s the world’s largest market

-       It’s not as risky as they say: the volatility of currency exchange rates is markedly lower than most other markets

-       Analysis and trading is tricky but there are many programs where you can have the transactions made by expert traders in their own accounts automatically duplicated in yours.

Just like investing in any other market or asset class, you should consider educating yourself before you dive in. That’s why we’ve put together a primer called “The Smarties’ Guide to Alternative Investing in the Foreign Exchange Market” which gives you just enough information about the Forex market, how it works and how you can participate as an investor. Smart investors can find it here.  Happy investing.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

In a Wall Street Journal article published this weekend, author Stephen Bernard took the stance that currency trading might not be worth the risk that some investors face when getting involved in this market.

Some might agree, based on their trading experiences, that this investment segment can be a little more challenging than putting your eggs into treasury securities or other vehicle. And as any investor understands, with increased risk comes the possibility for a increased gains. By using just one example in his story, Bernard painted a dark picture of the Forex market as a whole. I beg to differ.

Don’t we all know that diversification has been the proven method to any long-term, successful investment strategy? In my experience, any investment requires a balanced, well-thought-out approach. This is as true for choosing mutual funds as it is for delving into the Forex.

Further, some investment opportunities require a wider view of the economy. In Forex, as Bernard points out, many forces are driving the boom from stock-market volatility to a rise in online programs that have made forex easier than ever to trade.

He’s on target. The $4T daily trade volume of the foreign exchange market is more accessible than ever. But, one of the biggest challenges in Forex is gaining the experience and expertise necessary to succeed. Some autotrading programs answer this challenge by allowing investors to follow trade leaders or experts.

Where Bernard and I really differ is on this point. While 70% of solo Forex traders fail or are unprofitable, I see autotrading as a way to mitigate that risk. Bernard says that you should beware of trading programs because they “may raise even greater risks for unsophisticated investors”.

But if you choose the right program - one that you’re comfortable with and one you understand - you can actually take positions and follow traders that help hedge what might be perceived as riskier investments. Additionally, and I’d tell anyone this, you’ve got to be sure that transparency and full control of YOUR investment account is guaranteed. That’s what makes a good autotrading program successful for many investors.

Looking at some of the other points in the article, Joshua Brown, vice president of investments at Fusion Analytics Investment Partners LLC, an asset-management firm in New York, says investors should avoid the currency markets. That’s like telling someone not to invest in technology or oil or a complete market segment.

If Brown’s point is that the market is too volatile in general, then it’s imprudent to ignore an entire asset class. As I said earlier, balance is important in any investment strategy. And the word diversification should always be on the mind of any smart investor.

I’m thrilled that the conversation about Forex opportunities and the currency market generally is taking place. The more we can learn about any investment asset, the better off we all are.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

1 Comment

Here at Currensee, we’ve had another busy week tracking the top stories in the world currency markets. Check out what we’ve been reading:

European Central Bank President Jean-Claude Trichet has indicated this week that he may elevate interest rates in coming months and allow Portugal easier access to emergency funds in order to battle a looming economic crisis. Despite these expected rate increases, the euro continues to weaken. In other news, CLS Bank reports that foreign exchange transactions in June reached a record-breaking $5.12 trillion in volume, while hedge funds are still on the decline, with research showing that the average hedge fund was off 2.12 percent by the halfway point of 2011. In foreign-exchange news, NYSE Euronext shareholders voted this week and approved a $9.6 billion takeover by Deutsche Boerse AG of Germany. Meanwhile, Obama and congressional leaders will be trying again this afternoon to generate a new plan to raise the U.S. debt ceiling.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

There's a lot of talk these days about inflation and the impact of Fed policy on the dollar and the extension through the weaker dollar into higher commodity prices. Those looking to flame the Fed for its quantitative easing (QE) and generally loose monetary policy point to the falling dollar as the cause for oil going up above $100 and gold crossing $1500. While it's certainly true that the greenback is lower (the USD Index has been as much as about 12% off it's January peak), is the weak dollar really to blame for things like the rising cost of gasoline at the pump? Let's take a look at what the charts have to say about it all.

First is a comparative chart of oil prices in dollars and oil priced in euros. The chart below covers the last year's trading. The red line is the dollar value of a barrel of oil, referencing the left scale. The black line is the euro price of a barrel off oil (using front month futures), with that price on the right scale. Both scales are logarithmic so they express similar percentage moves between noted levels.

Now, the chart above doesn't show relative % gains for oil in the two currencies. Those are +31.3% in USD terms and +22.6% in EUR terms. This is about what we'd expected given the relative performance of EUR/USD over that time. The point of the chart is that aside from wiggles where oil has done better in one currency than the other for a period of time, the pattern of the two lines is consistent. Oil has been moving higher in roughly the same pattern, regardless of what currency we're talking about.

Now let's take a look at gold (again front month futures). Once more, the red line is in dollar terms and references the left scale, and the black line is euro terms referencing the right scale.

In this case, gold is up 29.6% against the USD and 19.4% in EUR terms. Again, that difference can be explained by the change in EUR/USD over the last year, which is as it should be. Here, though, we see a lot more variation in performance. In dollar terms gold has been in a fairly steady uptrend with only two relatively minor retracements. In euro terms, however, the ride has been much more dramatic. Those periods when the EUR line diverges considerably from the USD line are periods when EUR/USD was selling off.

The chart below highlights the variation between how gold and oil trade relative to the dollar. It shows EUR/USD on the top with the correlation between EUR/USD and gold plotted in red and the one with oil plotted in green.

Notice how much choppier the green line is than the red. That means the correlation between oil and EUR/USD is much more fickle than the one between EUR/USD and gold. That said, however, oil has spent more time with a positive correlation (meaning rising oil with rising EUR/USD and falling oil with falling EUR/USD). The gold correlation has been much more balanced. In particular, the gold correlation has been more negative when EUR/USD is falling.

Now, correlation does not mean causality. It just shows how similar the movement patterns are without looking at why that might be. The way I would tend to read the above, however, is to say that rising gold is more a factor of what's happening in the currency arena than rising oil prices. If you think about the implications of increasing money supply (which is what loose monetary policy is), then it makes sense. Gold is something with what could essentially be called a near fixed supply (very slowly increasing), so the more dollars there are the higher the value of gold per dollar (or any other currency). Oil has a different dynamic which is must more closely tied to economic considerations and geopolitics.

Adam at Forex Blog has posted a critique of a Wall Street Journal article which discusses the pending loss of primary reserve currency status for the US dollar. The WSJ article, written by Barry Eichengreen, provides some very interesting information about the use of the dollar in global trade and financial transactions. For example, 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars, and the dollar is the currency of denomination of half of all international debt securities, though in the latter case I'd ask what share of those debt securities are actually US government and related agency debt. Eichengreen believes, however, that the dollar will lose preeminence in the next 10 years.

Here are his reasons why:

1) Changes in technology mean exchanging less prominent currencies is less difficult and expensive than it was.

2) The dollar will soon have real rivals with the euro and Chinese yuan as the most likely candidates.

3) The dollar is at risk of losing its safe-haven status.

Let me address these points individually.

Changing Technology
I've been around long enough to remember when trading was done by telephone, not online. The technology has come along in leaps and bounds in the last decade or so. It's not just better tech, though, that makes for lower costs. It's also the fact that as forex market volumes have increased, and there's become more competition in the brokering and dealing arena, spreads have come down significantly. That's where you get the real cost savings.

It's worth noting, though, that as transaction costs have declined, we haven't seen any real marked shift in currency reserves. The dollar is still just about the same proportion of global reserves now as it has been for years. Technological improvements, as Adam notes in his piece, don't really impact the supply and demand for a currency. Maybe just a bit on the margins.

Rival Currencies
There have always been rivals to the dollar for the top spot. When the euro was launched it was immediately viewed by some as a challenger for the crown (though obviously not by those who thought the Euro Zone would blow apart). Why else do you think the SWIFT code for the exchange rate to the dollar was chosen to be EUR/USD rather than USD/EUR? It's been a dozen years now, though. As Adam notes, the euro suffers from being comprised of diverse parts. The debt and equity markets are fragmented among the constituent countries, countries with different credit and economic profiles. This makes for a much more shallow market for global investors to park their cash.

As for China, until the yuan is fully floated, it's not even a debate. Even if the yuan were freely floating right now, it would still be a big ask for it to challenge the dollar for prime reserve currency status. The Chinese financial markets are in their infancy. It will take much more than just 10 years for them to get big enough to be able to support major capital flows. Even the Asian Development Bank doesn't see the yuan as being a major factor in the currency reserve area. Adam notes that they forecast it will only account for 3-12% of international reserves by 2035.

What about the Swiss franc or the Japanese yen? Switzerland is too small an economy for the franc to ever be a major reserve currency. The Japanese economy is obviously a major one, but a key factor in being a prime reserve currency is having a balance of payments deficit. Japan does not have that (though things could change as the population there continues to age). This is also something that works against the yuan.

Loss of Safe-Haven Status
Eichengreen makes the point that recent economic and fiscal developments have caused the world to rethink the stability of the US markets and economy, putting the country's ability to sustain its track record of paying its obligations in doubt. It's a fair point. As Adam commented, though, this is old news, and is also of concern for the likes of the Yen and the Euro as well. The financial crisis didn't only do damage to the US system.

I disagree, however, with Adam calling the yen a, if not the, premier safe-haven currency now. Yes, the yen absolutely benefits greatly when the markets go into flight-to-quality mode. That, however, is related to the carry trade where yen are being borrowed to fund investments in other currencies. Scared investors bail out of those investments, meaning they convert their money back to yen and pay off the loans they took out. This is not the same as capital flowing into yen-denominated securities the way it flows into US Treasury securities in a panic.

For all the issues with deficits and the like, the US Treasury market remains the place risk averse money goes. So long as that remains the case, the dollar will remain the primary safe haven currency. There may be times when other currencies step in to the spotlight, as the franc has done recently on geopolitical developments, but those are transitory periods and not the real panic situations.

The Bottom Line
The dollar is not going to lose its position at the top of the heap any time soon. That's not to say there won't be variation in its exchange rate values, because there most certainly will be. That's also not to say countries and companies won't diversify their holdings, because they will as suits their needs. It's just that no major alternatives are going to be viable in the near future.