LORD COPPER: Dollar has decades left

It’s a good few years since those heady days when quite a number of seemingly intelligent people were happy to make the proposition that the euro could conceivably oust the US dollar from its position as the world’s reserve currency.

With the weight of the massive Eurozone domestic market behind it, the story went, it was perhaps only a matter of a few short years until international traders from around the globe would prefer the multi-national EU currency as the means of settling transactions.

I can even remember discussions about whether LME contracts should be introduced in the new currency.

How bizarre that now seems, to all except those tireless bureaucrats of the EU. Now, I can pick up the phone and speak to a raft of equally intelligent people who will assure me that the euro is the currency equivalent of a dead man walking.

So what went wrong?

Well, the conception of the idea in the first place. Trying to bludgeon together the disparate economies of the euro member states was never going to work. Why did anybody think that, for example, an interest rate regime suitable for the mighty German economic powerhouse would be appropriate – or even marginally sustainable – for the economies of southern Europe?

The result of that blunder – caused, I would suggest, by the idiocy of political desires trumping economic reality – are easy to see: the deflated Irish property bubble, bankruptcy in Cyprus and chaos in Greece. (To say nothing of economic stagnation and soaring unemployment across most of the member countries.)

Good thing we didn’t buy the hype and switch our reserves to euros, I would suggest. The dollar has problems – not least the way its government seems determined to devalue it through their quantitative easing programme, but actually, in its role as global reserve, it remains unchallenged.

The dollar replaced the sterling…
There were good reasons why the dollar replaced Sterling as the reserve in the aftermath of World War Two; Britain was close to being bankrupt after the war and its consequences and the British Empire, whose vast reserves of resources and commodities supported the pre-eminent position Sterling had held, was fragmenting and slipping outside London’s control.

In those circumstances, it was pretty clear that the UK was no longer in a fit state to occupy the role of world’s banker and something else was needed to provide the necessary stability.

The USA, with its huge availability of resources, major industrial base and effective moral leadership was the obvious candidate. Sterling could no longer fulfil the role of reserve, so by a natural process, it was replaced by the dollar.

So, a natural progression. That’s exactly what it wouldn’t have been if the euro had been forced by its cheerleaders into replacing the dollar.

For all its faults – not least, I must say again, its own governmental economic policies at times – the dollar is still the natural “safe haven” or reserve currency. It’s the one with the strongest backing and, although it moves, obviously, the least violent potential fluctuation.

Why bring this up now, and what relevance does it have to the world of metals?

Well, there are two reasons, really, different sides of the same coin.

We hear a lot about the growth of China, and therefore its increasing importance in world affairs; at the same time, there is a part of the commentariat that suggests that the yuan will soon overtake the dollar as a reserve.

…but the yuan will have to wait
While I accept that that may at some point happen, I don’t believe it is for some time; as I hope I have shown above, it needs to be an organic shift, when a large number of factors align to bring about the change. Those factors are for sure partly economic, but also political and cultural. The whole picture has to be complete and convince that the true ‘safe haven’ has really shifted. I’m doubtful of that position arriving any time soon.

In those circumstances, would it be the right moment for the LME to introduce yuan-based contracts?

I understand, and indeed fully support, the stated intention of increasing the market’s penetration of China; that’s clearly the right policy to be pursuing.

I’m also generally in favour of considering new things to trade – after all, that’s how we make our living. But is it not the case that right now, the securer hedge is denominated in the most widely-used currency, which is also the one the world trusts most?

When the Chinese economy overtakes the US, and all the economic, political and cultural stars are aligned, won’t that be the time? After all, last time it took not far off five decades to catch up with the change.

Lord Copper
editorial@metalbulletin.com