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BoE chief suggests cryptocurrency may dethrone Dollar

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LONDON : Bank of England governor Mark Carney has suggested that a virtual currency could one day replace the US dollar as king of the foreign exchange market.

The BoE chief aired vague proposals for a so-called "Synthetic Hegemonic Currency" at the recent Jackson Hole Symposium of central bankers.

Here is a brief assessment of why the greenback is losing its lustre and the outlook for Mr Carney's proposed new digital currency.

DOLLAR DOMINANCE

The dollar has been the world's reference currency since the Bretton Woods agreement in 1944, when various key units were fixed to the value of the greenback. It has retained its global supremacy ever since, thanks to the economic and political clout of the United States.

"The dominant currency is always that of the world's biggest political power," noted Mr Philippe Waechter, head of research at Ostrum Asset Management.

The US dollar accounted for almost 62 per cent of global foreign exchange reserves in the first quarter of 2019, according to the International Monetary Fund.

Although the dollar has lost its sparkle owing to globalisation and the changing world economic order, gyrations in the US unit still impact economies elsewhere.

"US developments have significant spillovers onto both the trade performance and the financial conditions of countries even with relatively limited direct exposure to the US economy," Mr Carney said at the recent bankers' meet in Wyoming.

When the greenback appreciates, so do repayments for many emerging nations because their debts tend to be denominated in dollars.

NEW VIRTUAL CURRENCY

The BoE chief, who steps down in January, added: "In the longer term, we need to change the game."

The public sector, in the form of central banks, could instead provide the best support for a new virtual currency, according to Mr Carney.

"It is an open question whether such a new (cryptocurrency) would be best provided by the public sector, perhaps through a network of central bank digital currencies," he said.

Yet central bankers and world leaders alike remain anxious over the current crop of virtual currencies because they are unregulated.

US President Donald Trump himself has lashed out at Bitcoin and Libra for being "based on thin air" and having no standing or dependability - unlike the dollar.

Commentators believe Washington is unlikely to allow the greenback to lose its cherished status as the world's premier reserve currency.

The BoE governor meanwhile made explicit references to Libra - a future cryptocurrency unveiled by social media giant Facebook in June.

Libra, which aims to launch in the first half of 2020, will be backed by a basket of currency assets to avoid the wild swings of bitcoin and others.

Yet Libra has also attracted the ire of central bankers owing to its origin in the private sector.

"Central banks are a little annoyed by this (Facebook) bid to privatise currency," said Ms Agnes Benassy-Quere, a researcher at the Paris School of Economics. - AFP

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