Saturday, 15 September 2012

What are the hottest currencies?

We have written excessively about the role of national currencies in recent days - ranging from the description of 19th century currency union, to the description of the gold standard and much more. What may still leave some readers wondering is that which currencies are the hottest ones, the most used in international trade?  Ever wondered why don't we trade in Russian rubles or Chinese renminbis instead of US dollars? Check out the infographic below, and then read on to get your answers.

So what is a world currency?

The term 'world currency' simply means that a particular nation's currency is so popular in international financial markets for a reason, that independent economic actors conduct business using it, buying the issuing country's government bonds, etc. Being the producer of a world currency is great - but it's not easy, and not everyone can do it, even if they're economic powerhouses.

Why not the ruble?

Let's consider the case of Russia, for example - they are producing around 5 percent of global GDP, which sounds like a lot for a single country, right? The bad news is that it isn't - for example, China is producing four times as much. But that alone should not be a problem - UK only produces 2.9, yet people like the British pound -, it's something else: corruption, state control and instability. Russia suffered a bankruptcy in 1998, and it's inflation rate has been in the double-digit zone several times since. That makes the ruble a dangerous currency to invest in, considering the possibility of a sudden devaluation.
Also there are the burdens of excessive state control - the Russian Central Bank is only de jure independent, it's decisions are generally overruled by daily political concerns. Finally,. Russia ranks 147 on the Transparency International Corruption Perception Index and 120 in the World Bank Doing Business Index of some 180 countries.Who would buy the money of such an unsafe state?

Why not the renminbi?

Okay, Russia is out - but what about the Chinese currency? The answer lies with monetary policy - in order for a currency to serve as an international reserve currency, it should have an independent exchange rate, hence not directly influenced by other currencies' price fluctuations. That is not the case with the renminbi - it's pegged to a basket of several other currencies, including the ones it could theoretically replace as a global reserve currency.

Interested in historical examples of global currencies? Find us in e-mail or comments.

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