Over two millennia later, imperialist Britain found itself in a similar position with the pound sterling flowing freely across its multiple colonies as the de facto mode of payment for all trades that took place as the colonies were barred from exporting goods. The failure of the gold standard and the WWII victory paved way for the USD. Post WWII, in the face of a diminished Britain, a shattered France and a devastated Germany, US government adopted protectionist policies by undervaluing the dollar to boost international exports while imposing high import tariffs. This allowed the USD to establish itself as the primary international currency.
Along the way, starting in the 1970s, Japan had displaced Germany as the second largest economy with roaring international exports resulting in vast trade surpluses and enormous foreign exchange reserves. This phase fizzled out in the 1990s as the bubble of the over-appreciated Yen burst, moving Japan into a phase of stagflation for the next two decades. Even so, the Yen at its peak only accounted for 9% of the world’s currency reserves as over 90% of the Yen bonds were held domestically.
The rise of the US Dollar, apart from the previously mentioned global events was fundamentally sustained as a result of the trifecta: highly developed financial markets that operate transparently, high levels of liquid easily interchangeable assets and backing by a relatively stable business friendly government. Undo...
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... own destiny while treading the path with utmost dexterity and diligence.
This brings me to the original question: Will the Renminbi emerge as an International Reserve Currency? My answer would be a definite, emphatic yes! As of 2012, China is at step one in its plan of internationalizing the RMB by establishing itself as the trade settlement currency following which it aims at becoming an investment currency before finally becoming a true reserve currency. However, the time and global conditions in which that might happen are highly uncertain, maybe in 20 years or even 30 years. Even, so it would be an addition to the dollar and the Euro and not a replacement. All of this is true, assuming China continues on its path of growth, liberalization and internal reforms without creating any negative shockwaves. The world watches as the crouching dragon raises it head.
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