There is always a fair amount of buzz in the financial news regarding the imminent demise of the dollar—and rightly so. This is especially true in the long-run. The "reigning heavyweight champion" of fiat currencies is still, by and large, the world's reserve currency of choice. However, there's increasingly reason to believe that the USD could be unseated from this role as soon as next year.
Forecasters Favor the Yen
One of the key themes of 2016 may be the differing paths taken by central banks in Asia and their European counterpart. After years of failed monetary policy of the exact kind being implemented in the eurozone right now, the Bank of Japan finally appears to be undertaking structural reforms in order to grow its economy rather than relying upon printing more money.
This pivot has convinced a few of the analysts at major U.S. firms interviewed by Bloomberg that the yen will outperform its peers next year. Notably, Morgan Stanley sees the yuan strengthening to 115 per dollar and JPMorgan goes even further, calling for 110/$. The yen currently trades near 123 per dollar. The latter case would be better than a 10.5% gain against the dollar.
The median estimate of the 50 analysts, however, was for a slightly weaker yen, at 125 per dollar. The calls by the likes of JPMorgan are still telling. Moreover, the yen was fairly steady amid global upheaval this year after a decade of weakness.
Key to the yen's potential rise is the country's current-account surplus (i.e. a positive national deficit). The Japanese finance ministry has reported 16 straight months of surpluses. This is a strong measure of the country's strength in trade even if much of the global economy falters. For instance, when emerging markets were pummeled during the third quarter this year, the yen was insulated, gaining 2%.
Down the Road: Chinese Yuan/Renminbi
There's more reason to believe that the yen's brighter forecasts for 2016 could coincide with gains for the yuan, as well. Similarly to the BoJ, the People's Bank of China appears to have made strides to legitimize its economic infrastructure. The PBoC is moving away from stimulus and focusing more on liberalizing its financial system. The People's Republic's preliminary steps toward loosening control over the exchange rate of the CNY is seen as a big part of the IMF admitting the currency to its Special Drawing Rights (SDR) basket.
Like the yen, the yuan will likely experience some rough trading while this process of liberalization is going on. (The currency recently touched a 4-year low.) While greater volatility for the yuan is to be expected as the PBoC supposedly allows market forces greater sway in determining the its value, there's little question that (if all goes according to China's plan) the yuan will have greater international esteem by the end of 2016.
The renminbi will officially become a component of the SDR in October of next year, so 2016 could shape up to be all about Asia's biggest powers in the financial markets.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.