Gold Replacing Dollar as World’s Reserve Currency?

With food and oil prices on the rise, central banks usually look to the U.S. dollar to secure the value of their savings. However, according to reports, banks are looking to gold.

From CNBC.com:

What are they buying instead?

The yellow metal hit a fresh record high this morning, while the dollar index dropped to a 15-month low. The news had Fast Money’s Brian Kelly looking to add more gold and silver longs to his portfolio Thursday morning.

“What is working is gold, silver and oil,” said Kanundrum Capital’s Kelly. “I wish I had more.”

Gold and silver have become the inflation hedges of choice for some investors. Gold hit an intra day high today of $1,448 per ounce. Silver is trading at 31-year highs, hitting an intra day high of $38 per ounce.

More at CNBC.com...

U.S. Dollar Is Still The World's Most Trusted Currency

Although America’s recent economic troubles have caused damage to the reputation of the U.S. dollar, many economists are claiming it is still the strongest and most trusted currency. According to this article on USA Today.com, although our country has debt problems, they are not nearly as bad as the troubles other countries are having. Additionally, no other country has a currency as strong or as well-regarded as the U.S. has, even with its current fiscal woes.

Could the debt eventually push the U.S. away from its status as a reserve currency and into second-tier status?

"It's very difficult for a reserve currency to lose that status," says Kristin Lindow, vice president at Moody's Investors Service. "It takes another nation to take its place, and right now, there isn't one."

As long as the U.S. looks better fiscally than other nations, it will be able to finance its deficit. But that doesn't mean it can continue to bleed red ink forever. In the short term, interest rates are likely to remain low as the Federal Reserve tries to nurse the economy out of recession. In the long term, however, unchecked borrowing could lead to higher interest rates and slower economic growth. As such, the debt has serious implications for savers and investors.

Fears of dire economic consequences have mounted as the U.S. annual budget deficit has soared — and the warnings aren't just coming from Republicans. President Obama last month created a bipartisan panel to rein in the nation's deficits. In November, Treasury Secretary Timothy Geithner called the deficit too high. The Federal Reserve Chairman Ben Bernanke is also worried about the deficit.

"We have a debt that will continue to grow," Bernanke told Congress in February. "It's important to look at the deficit as it goes forward."

But even though the nation's debt, relative to gross national product, is the highest since World War II, the financial markets seem unconcerned. Investors eagerly buy our debt and use the dollar as the premier trading currency worldwide.

Obama says US Must Address Currency Rates

According to Reuters.com, President Barack Obama told reporters yesterday that China and Asia would be a huge market for U.S. exports, but that his administration wants to address currency rates to ensure American goods were not facing a “disadvantage.”

"One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our ... goods are not artificially inflated in price and their goods are artificially deflated in price," Obama told senators from his Democratic party.

"That puts us at a huge competitive disadvantage."

Dollar's days of dominance may end

From the Washington Times:

World Bank President Robert B. Zoellick warned Monday that, with foreign economic powers rising quickly on the world stage, time is running out for the privileged role enjoyed by the American currency.

The dollar's status as the world's reserve currency has given the U.S. prestige and privileges that are unique in the world, lifting living standards by enabling Americans to borrow cheaply and consume far more than they produce with little consequence for decades.

"The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," Mr. Zoellick said in a speech to Johns Hopkins University's School for Advanced International Studies in Washington. "Looking forward, there will increasingly be other options to the dollar."

Mr. Zoellick, who was appointed by President George W. Bush, noted that the world economic order established after World War II, with the United States and a handful of European countries largely dominating, is quickly coming to an end.

Dollar Adds to Gains As Investors Mull U.S. Jobs Data

From MarketWatch.com:

"This past Friday may have been a turning point in that relationship and we need to be alert to more traditional fundamental factors coming back to drive foreign exchange," said Brian Dolan, chief currency strategist at Forex. "A brightening U.S. outlook may increasingly begin to support the dollar."

The dollar index, a measure of the greenback against a trade-weighted basket of currencies, rose to 79.365 from 78.940 in late North American trading on Friday.

The euro traded at $1.4135 versus the dollar, down from $1.4179 Friday.

Since the credit crisis reached its peak, the dollar has tended to lose ground on favorable economic news and rallying equity markets, while rising on bouts of safe-haven buying on negative news and falling equities.

The U.S. currency rose on Friday along with equities, indicating a correlation directly to the economic outlook may be reasserting itself. More typically, the dollar rises along with positive economic news -- and the potential for rising interest rates, boosting yields on the country's bonds -- as those qualities make a nation's currency more attractive compared to other countries where the growth outlook and interest rates may not be as appealing to investors.

In that regard, the U.S. looks more likely to emerge from the recession before both Europe and Japan, making the dollar more attractive than the euro and yen.

"If currencies were to trade on cyclical differences from here on, the U.S. dollar would be set for clear outperformance," said currency strategists at Citigroup. The firm expects the U.S. economy to grow 2.1% in 2010, which the euro-zone grows just 0.5%.

All markets are also on edge before the Federal Reserve's monetary policy meeting on Tuesday and Wednesday. Analysts expect little change to officials' statement about leaving interest rates unchanged for an extended time. See story on Fed rate policy.