The hunt is on for a new reserve currency

The dollar's reign as the world's reserve currency is slowly coming to an end. But with so many candidates vying to usurp the greenback, which currency will be the one that everybody wants? Matthew Lynn investigates.

It wasn't the least unexpected thing that ever happened. Barcelona's winning the football Champion's League was probably more of a foregone conclusion. So was Andy Murray's crashing out of Wimbledon in the semi-finals. Still, the decision by the ratings agency Standard & Poor's (S&P) to strip the United States of its triple-A rating can hardly have come as a great surprise to anyone.

The US had been looking less and less creditworthy for years. Japan lost its triple-A rating years earlier. There was no real reason why the debt-addicted US should hold onto the top investment grade much longer. The real issue was when it would get downgraded, not if it would. So the short-term panic around the move can be safely ignored. The market responded in its usual bonkers way, hammering the price of equities, and moving instead into US Treasury bills. In fact, anyone thinking straight would have been moving in precisely the other direction. The message of the downgrade was that the debts of cash-strapped governments looked a lot less attractive, while cash-rich corporations looked a better bet. But in the middle of a panic, markets rarely move rationally. It is the medium term that matters. And the medium-term message of S&P's decision is that the dollar cannot survive much longer as the world's reserve currency. But after the dollar, what comes next precisely?

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Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.