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The US Dollar has been the king of currencies for some time now. According to Soros, there was a flight from all currencies, which is why the price of commodities, especially gold and oil, were generally rising. He also stated that an orderly decline of the dollar was desirable and that the entire system needed to be reconstituted towards a global currency. When commodities, notably oil, is bought and sold in the futures markets it is done in U.S. Dollar denominations. This is why we see such a strong negative correlation between the price of crude oil and the value of the US Dollar.
Based on the predictions of Soros, China will be the new engine of the global economy and the Yuan will replace the US Dollar as the new world reserve currency. The International Monetary Fund has the right idea with their SDR (Special Drawing Right) basket of currencies, which includes only the currencies of industrialized nations; British Pounds, Euros, Japanese Yen, and US Dollars.
According to the Financial Times, Overlay Asset Management has brought to life an attractive alternative to the IMF’s basket, the Wealth Preservation Currency Index. This index consists of the currencies of the world’s 15 largest economies, weighted by their gross domestic product, adjusted for purchasing power parity. The PPP element ensures a higher weighting to emerging market currencies than is commonplace in other currency baskets, with the Chinese renminbi (accessed through non-deliverable forward contracts) accounting for 16 per cent, Indian rupee 6 per cent and Brazilian real 4 per cent.
This “currency war” continues to heat up, with no palpable resolution in sight. While it would be a tedious process to replace the US dollar as the world’s reserve currency, it appears unavoidable, especially while Big Ben’s quantitative easing and loose US monetary policy continues unabated.