KARACHI, Dec 11: Given the present trend of a depreciating dollar whose value has fallen by 35 per cent against the euro, 24 per cent against the yen and 17 per cent against the broad basket of currencies over the past three years , the greenback will cease to be the dominant reserve currency in the world.

Currently, dollar reserves held by the central banks are down to 65 per cent against 80 per cent in mid-1970s." The almighty dollar is now facing a different phenomenon", says Saleem Umer, head of the Institute of Bankers of Pakistan (IBP). It is likely to be replaced by a multiple currency reserve system shared among dollar, euro, yen and later by yuan, says former Pakistani ambassador to Japan Najamul Saquib Khan.

In a talk on "Fall of dollar: causes and consequences", at the IBP, Mr Saqib spelt out the essentials that make a reserve currency and the dollar's position in this regard. The reserve currency with a stable value is a national unit of a leading economy which avoids inflation. The currency should retain its value and purchasing power and serve as a store of value.

When the value of reserve currency fluctuates, it creates risks for the global financial system. Reserve currency has a net creditor. When the UK ceased to be net creditor, the pound sterling was dethroned by the dollar.

Mr Saqib reckons that euro may emerge as an alternate reserve currency as eurozone is the biggest exporting area in the world. The European Union is not much smaller economy than the United States. Initially, some of the reserves from the dollar will be taken by euro, followed by yen and later by yuan.

He recalled the Plaza Accord signed on September 22, 1985 under which the United Sates forced Japan to revalue the yen from 270 to 130 to a dollar in the 1980s, the United States was a net creditor. Now the yen is at 102 to a dollar and America is a net foreign debtor.

Highlighting the fundamentals, he said the US budget and balance of payments deficits were financed by surpluses from Asian countries which do not have high incomes as compared to Americans and Europeans and needed to invest these surpluses in their own domestic markets to reduce poverty.

The future of the dollar as a reserve currency, anchor of global trade and a store of value is now coming under increasing scrutiny as a result growing US budget, trade and balance of payments deficits.

The implications of a weakening dollar (or even a feared crash of the greenback if US fiscal imbalances continue to mount), for the global economy has become a source of worry around the world, because the US secretary Snow asserts that it is an issue whose resolution is a global responsibility. If the budget deficit is reduced, it may cause recession in the US economy.

As the increasing American balance of payments is becoming unsustainable, it would be risky to hold a depreciating dollar asset. Federal Reserve chairman Alan Greenspan has warned that given the current account deficit in the USA there is going to be a movement from dollar to non-dollar assets.

Najamul Saquib however believes that the imbalances in US economy must be removed. No power, how great it may be, can escape the fundamental laws of economics for too long.

Though the dollar has lost much of its lustre as a store of value for individuals in Pakistan, it is still an anchor of foreign trade and a reserve currency for the State Bank.

The dollar is losing its hegemony over the global financial system and will be eventually be replaced by a multiple currency system. The international economic order is changing with new regional growth centres shaping the global economic landscape. The demand for democratic practices in global affairs are becoming pronounced. And a unipolar dispensation is giving way to multipolar world. And Iraq is setting the pace.