Future of Dollar as the Reserve Currency

Introduction
From the gneiss of the foreign trade and globalization, dollar has been the sacrosanct currency of exchange. The political , social and strategic clout of United states stems from the strength of US Dollars in the world economy. Till Date it is the largest foreign reserve currency followed by Euro , British Pound and Japanese Yen. Such is the impact of the dollar, that almost every country keeps major chunk of their foreign reserves in terms of dollars. The purchasing power parity of nations are calculated by IMF on the basis of dollars. As an currency of settlement , it is usually a medium of exchange between the countries not having a common currency.
With the tremors of recession in about last 2 years, there are clear indications of change in the world order. After the bursting of the housing bubble in united states , governments all over the world had tried to inject surplus liquidity in the financial systems to keep them up and running. US had led the surge with millions of dollars granted to various firms under Troubled Assets Relief Program (TARP). This has created a huge trade deficit on the part of the US Government. To finance this deficit , US Government need to issue treasury bills and needs countries to buy them. Here comes the role of China in the world Economy. For a long time China is the major exporter to United States. Authoritarian Government, cheap labour and large population has leveraged China to sell (or Dump) the products all over the world. The foreign reserve of China is hovering around $2 Trillion Mark. China in turn uses this currency to buy US treasury bills.
For the last two months, China's leadership has been complaining about the country's dangerous dependence on the dollar. Beijing holds $2 trillion in dollar assets, accumulated through years of exports to America and massive purchases of Treasuries by the Chinese government. If Washington can't rein in its mounting budget deficit, both Treasuries and the greenback could weaken considerably—and the Chinese could be big losers as a result.
The Chinese began generating attention on the issue in March, when Chinese Premier Wen Jiabao said he was worried that the country's dollar assets could slide. Ten days later Chinese central bank chief Zhou Xiaochuan suggested replacing the dollar as the international reserve currency. One idea, Zhou said, was to replace the dollar with a basket of currencies supervised by the International Monetary Fund.
So, the evidence is mounting that China is getting serious about loosening their ties to dollar and even replacing the yuan in place of dollar as the reserve currency. Already, China will trade with Argentina, Hong Kong, Indonesia, Malaysia, South Korea directly in Yuan thereby eliminating the use of Dollar as an intermediary currency. China denominated a bilateral trade agreement with Brazil not in dollars but in two countries’ currencies. This makes it clearly evident that China has intentions of making Yuan the next reserve currency. Some experts are still skeptical about the possibility of replacement of dollar as a reserve currency given the political and economic infrastructure in china and lets us say all over the world. But there are others also, who are predicting a major shift in the world order by 2020. Chinese have set a target of increasing percentage of Yuan in foreign exchange reserve to more than 3 percent by the year 2020.If this happens then Chinese Yuan would replace Japanese Yen as the fourth largest foreign currency reserve. There is every possibility of reaching the target keeping in mind the booming Chinese economy.
Roadblocks for Yuan
Skeptics said the Chinese were merely talking. The dollar is too entrenched as the international currency of choice, with the U.S. by far the world's largest economy, went the thinking. And in any case, the Chinese act so deliberately that, even if they did wish to elevate the yuan globally, they wouldn't do it in the short or medium term. Finally, if the Chinese were to bring the yuan into competition with the dollar as a medium of international trade, they would have to turn the yuan into a convertible currency whose value would be dictated by the market, with traders, investors, governments, and companies around the world freely buying and selling it. Such a loss of control, said many Western investors, would never be allowed by the authoritarian Chinese. It would mean lowering all kinds of financial trade barriers, allowing foreign access to Chinese securities markets and more.
Big hurdles remain for the Chinese. Making the yuan freely convertible is one: Major central banks would be loath to hold any large sums of any currency—the purest definition of a reserve currency—if they could not sell or trade it without limitation. Another is the absence of a large market for yuan-denominated bonds. One key sign of acceptance as a reserve currency would be if Western countries such as the U.S. purchased bonds denominated in yuan and sold at market rates. Until now, yuan-denominated bonds have been sold only by Chinese banks, along with multilateral banks such as the Asian Development Bank and International Finance Corporation, and the bonds have been sold only in China.

Future Ahead
Why have perceptions started to change? Last month, Beijing completed the last of a series of so-called currency swaps—providing yuan to other central banks for use in trade with China—with Argentina, Hong Kong, Indonesia, Malaysia, South Korea, and others. These arrangements theoretically removed any need for these trading partners to use the dollar as an intermediary currency in dealing with China. Last week, Beijing denominated a bilateral trade deal with Brazil in the two countries' currencies, rather than in dollars; the value of the agreement was not specified.
Still, what is more or less a consensus among Western experts on China seems to have formed that the Chinese are on an unmistakable path toward challenging the dollar. What remains lacking is a political decision to shift from acting on the margins to making a decisive move, many experts say. That resolve may be forming. A Chinese official said on May 20 that the yuan could be a serious reserve currency by 2020.