What Is Reserve Currency Status?

Three weeks ago, the International Monetary Fund (IMF) announced that the Chinese renminbi (aka yuan) would join a group of other currencies to comprise what’s called the SDR (Special Drawing Rights) basket. This led some pundits to speculate that this step was a sign that the renminbi would inevitably replace the US dollar as the world’s “reserve currency.”

Having reserve currency status is a big deal. Because the terms of the 70-year-old Bretton Woods Agreement basically made the US dollar the world’s reserve currency, the US essentially sets global monetary policy. Foreign banks, businesses, and governments have no real choice but to hold trillions of dollars to facilitate trading and settle debts.

In other words, reserve currency status creates a huge demand for dollars worldwide. And that’s a huge advantage for the US because it allows its government to build up enormous budget deficits, year after year, without eroding the value of the dollar or raising interest rates.

Does that mean you should liquidate all of your non-US dollar investments and hold them exclusively in dollars? Not at all. Rather, I suggest you take advantage of dollar strength to make investments in countries whose currencies have fallen precipitously against the dollar in recent years.

Emerging markets have been hit the hardest. Currencies even from countries like Brazil, Russia, and Colombia are trading at the lowest level against the dollar in 15 years. The strong dollar has also made Thailand, Malaysia, Turkey, South Africa, and many other countries relatively cheap in US dollar terms.

If you have income or assets in US dollars, now is the best time in many years to diversify internationally. And if you’re a retiree looking for a millionaire lifestyle on a fixed income, living overseas is definitely worth considering.

What are you waiting for? The strengthening dollar has significantly reduced the foreign exchange risks of international investments for Americans. There’s no better time than now to “go offshore”!

Reprinted with permission from Nestmann.com.

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