A question we hear coming up in conversation these days is, “Should I be concerned about the dollar in light of global financial crises and the anticipated action by the International Monetary Fund (IMF) this fall?”

Let us take this opportunity to calm some jitters.

What people are referring to is the possibility that the IMF will allow the Chinese Yuan to be added as a reserve currency in November. This isn't new information and is widely known by market participants. As of today, there are 4 reserve currencies: US Dollar, Japanese Yen, Euro, and British Pound. The US Dollar is the dominant currency at over 60% of the float.

The US gets a vote within the IMF regarding whether to allow the Yuan, and by all accounts the US will allow it. With that said, any change to the float won't (can't) happen overnight, as this requires market participants to essentially buy and sell sovereign debt denominated in the local currency. 

All participants wishing to use the Chinese currency (including China) will need to sell their US Bonds, in order for this to happen. The ability for there to be a fire sale would severely decrease the value these participants receive. (In other words, China would reduce its net worth in order to make the change overnight.)

While all of this is possible, it isn't at this time practical. For the most part, the developed world views China's markets as not "free" at the very least, and most likely to be heavily manipulated.

We do keep an eye on IMF activity, which usually is not cause for action on our part. However, if at any time we feel like it is appropriate, we'd take the necessary steps to blunt the effects of an IMF decision on our holdings. By the way, this is the same IMF that recently begged the Federal Open Market Committee (FOMC) to leave our rates unchanged until late next year or longer in order to give the rest of the world a chance to get their economies in better shape.

We hope this explanation helps allay some fears. We are happy to answer questions like this for clients and welcome the opportunity to keep you informed.