Multi-polar monetary system to challenge US dollar dominance: Credit Suisse

Credit Suisse Research Institute (CSRI), the in-house think tank of global financial services provider Credit Suisse forecasts the gradual emergence of a new, multi-polar monetary system as an alternative to the current US dollar-dominant monetary system.

In a 'The Future of the Monetary System' report released on the sidelines of the World Economic Forum Annual Meeting at Davos on Tuesday, CSRI says that the new model will emerge as a result of the increase in bilateral trade of many countries, the deepening of local capital markets in emerging countries and efforts to develop mutual insurance schemes against shocks resulting from shifts in US monetary policy.

The report notes that the current monetary system has repeatedly been criticised by senior policy makers, both in advanced economies as well as emerging markets due to the stresses created outside the United States from major shifts in US monetary policy. "Even in the absence of geopolitical and economic calamities, a further diminution of the role of the US dollar in global foreign exchange reserves is likely due to three factors: the diminishing need for FX reserves in a world of floating exchange rates, the active diversification policies of central banks and the increased use of swap lines between central banks," it says.

According to CSRI, the US dollar represents slightly more than 60% of global forex reserves at central banks, compared to more than 80% in the early 1970s. However, there are no clear candidates to replace the US dollar as lead currency in the foreseeable future. "Neither the euro nor the renminbi qualify as alternative currency "hegemons." The creation of a global currency remains illusory as that would require an intensely cooperative geopolitical environment," the report notes.

The report concludes that while there are no clear candidates to replace the US dollar as lead currency, and the creation of a global currency remains unlikely given the current fractious geopolitical setting, the deepening of capital market and increased trade among major emerging markets are boosting the role of their currencies. It also points out that the mutual insurance schemes (of countries other than the US) to protect against the fallout from US dollar gyrations and steps to develop an alternative payments system signals the possible emergence of a more multi-polar currency world.