Every few months there’s some sensational report published about how the USD will lose its reserve currency status and be replaced by either the EUR, JPY, Chinese Yuan or one of the many crypto-currencies now floating around in the cyber-network.
These reports are usually preceded by a period of technical weakness in the USD, like we’ve seen over the last two weeks.
The most recent version centred on a Russian and Chinese plan to circumvent the US SWIFT payment system to settle Iranian and Russian crude oil exports to China, denominated in Chinese Yuan. The idea is that other global importers of oil would follow suit, which would methodically eliminate the need for USD within the crude oil market.
Like most of these anti-USD theories, it looks good to Forex traders on paper. However, these notions overlook the reality that despite the massive scale of the crude oil trade, transfer payments for oil make up less than 2% of the total USD SWIFT daily turnover.
So, how did the USD become the global reserve currency and how sturdy is its status?
It’s widely agreed that the USD replaced the Sterling as the world’s principle reserve currency at the Bretton Woods conference in 1944. At this time in history the UK and most of Europe were still rebuilding from WW2, Japan had been vanquished and China was in the throes of a civil war. Conversely, the USA was in a powerful position in both manufacturing and military capacity.
The simple definition of a reserve currency is the monetary unit which is most widely held by all Central banks. It’s called the reserve currency because it’s accepted most readily as settlement in international trade and capital asset transactions. According to a report earlier this year from the Bank of International Settlements (BIS), the USD represents about 60% of the total foreign currency reserves held by global central banks.
In contrast, the EUR makes up about 20%. The remaining 20% is denominated in GBP, JPY, AUD and CHF. The Chinese Yuan makes up less than 2%.
Understanding this dominate position of the USD in the composition of the global reserves matrix, it’s easy to dismiss the the periodic warnings of a collapse of the USD and loss of its principle reserve currency status. Based on the BIS numbers that process would take years, if not decades, before the USD would be replaced.
On balance, we are still confident that the USD hegemony and interest rate differentials will see the USD regain its bid tone and rally into the end of the year and early 2019.
Our trade suggestion to sell GBP/USD at 1.2880 was filled. We suggest holding short from 1.2880 or better with an initial target of 1.2610 and a 1.2985 stop.
The highlight of the European session will be the release of French and German PMI data. Traders will focus on whether the weakness in Q3 will spill over into Q4. We are still holding short EUR/USD from 1.1560 with an initial target of 1.1215 and a 1.1495 stop.
Our trade suggestion to sell the USD/JPY at 113.25 was filled. We suggest holding short from 113.25 with an initial target of 110.20 and a 114.90 stop.
The AUD/USD has once again met resistance over the .7300 area and has set up a double top pattern near .7325. Internal momentum indicators are now rolling over with the RSI at 54 and pointing lower. We suggest holding short from .7255 with an initial target of .6970 and a .7385 stop.
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