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Reserve Currencies: Climbing Greenback Mountain

According to many forecasters, China is moving towards making the yuan a fully fledged reserve currency so as to rival the dollar and the euro. China’s policymakers are still undecided on the matter, however – as they often are with regard to freeing finance. On the one hand, restricting the flow of money into and out of China better serves the country’s immature banking system. On the other hand, China is not in favor of relying on the dollar, and officials are worried about the Federal Reserve’s notably loose monetary policy and by America’s rapidly rising public debt. According to the Peterson Institute’s Arvind Subramanian, reserve-currency status depends on three primary gauges of economic dominance: size of the economy, exports, and net foreign assets. In light of this, the yuan is anticipated to soon outgrow its current position a junior alternative to the dollar or the euro, and rather to adopt a new position as the main global reserve currency.

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