The Challenges of the Dollar Being an Intenational Reserve and Investment Currency

dollar was close to an eight year shortage against the real, having lost more than 33% of its value during 2009 alone. During the past 12 month era, the exchange rate of the U.S. dollar (USD) has diverse from a low of BRL R $1.5310 to in height of BRL $1.7790. During 2010, the United States dollar typically kept an everyday exchange rate between (BRL) R$1.70 and (BRL) R$1.80, occasionally reducing below the (BRL) R$1.70 level.

In 1974 the decline of the west was already predictable and U.S president Nixon made a deal with Saudi Arabia. In return for buying oil in dollars, the U.S would guarantee military security and the petrodollar was born. This guaranteed a steady supply of income for the U.S, as the Federal Reserve is a conglomeration of private companies taking a percentage of every dollar used. Rivero’s fascinating insight into the how the dollar plays a key role in U.S foreign policy explains the reasons behind many U.S actions today.

The financial crisis of 2008 has been described as the worst financial crisis the world has seen since the great depression, but there are now murmurings of the potential for an even greater financial crisis, a currency crisis, caused by the demise of the US Dollar. The Dollar has been the reserve currency of the world since it took over from the Pound at the end of world war two, but we examine if it is about to crash spectacularly?

As the worlds most dominate currency, the USD hold to large advantages of being currency reserved. Each dollar stockpiled and bought in non-US countries is one dollar that the US citizens gave that purchases power against other nations for free. The status of being the main world international trade

Throughout the 20th century, the United States has slowly constructed a global system of control. Its superior military, weaponry and intelligence apparatus have been crucial in this system, but an equally important factor has been its control of the global economy, and its primary weapon, the U.S. Dollar. The dollar’s world reserve status alone does not make it unique, but its deeply rooted role in American and global geo-politics certainly does. As Vassili Fouskas and Bülent Gökay point out in their book The New American Imperialism, “Dollar hegemony has always been strategic to the future of American global dominance, in many respects more important than America’s overwhelming military power. While military power is more visible and useful as a display, it is the dollar’s role as reserve currency that secures the domination of the U.S. in the global economic market place”. [1] This system is built on serious fault lines and its future is the most important issue for international relations today.

In the similar time period Japanese Yen has been in the third position with a turnover position of 20.8% in the year 2005. The overall financial market currency structure has seen a decline in the turnover position of the US Dollar to 85% from a strong position of 88%. Similarly a decline has been in the position of the Japanese Yen to 17.2% from an acceptable turnover position of 20.8%. While considering the trend of these two currencies during the period starting from 2007 and ending at 2010, it is to be noted that minute changes were seen in the two different currencies with regards to their share in foreign currency market. The US Dollar witnessed a continued fall to 84.9% from its previous 85.6% however, the Japanese Yen saw a rise from its previous position of 17.2% to an increase of1.8% that is 19%. During the same time period the US dollar and Japanese Yen were the second most traded paired currencies and was traded at around 14% of the overall foreign currency market second to the US Dollar and Euro pair. Conclusion The foreign exchange market has seen considerable changes owing to the global financial crisis. It is to be seen how different factors like economy and global politics further impact strong currencies like the US Dollar and other competing currencies such as the Japanese Yen.

The United States is a powerful country with a powerful economy. It has a huge presence in the international market and this is due primarily to its exorbitant privilege. Exorbitant privilege is the benefit that the US is able to enjoy due to the dollar’s status as the currency used for international reserves. Many economists have criticized this privilege of the US, including Barry Eichengreen. Eichengreen presents the argument that the dollar should not be the only currency that is used in the International Monetary System (IMS) and that despite its history, it no longer has a reason to be the only currency in the global economy, believing that the IMS would benefit from having multiple international currencies. He argues this by presenting the history of the economies throughout the world that have led to this point. His presents his argument in his book Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.

Though my understanding of currency exchange is very limited, I believe that it was beneficial for El Salvador to adopt the US dollar as their official form of currency. As CNN’s article states, millions of dollars were sent to banks to familiarize themselves with green backs, so it is not as though the shift was unexpected or ill warned. With their economy already being familiar with our currency, taking in an average of “$4 million a day” alone from Salvadorans living in the US, there does not seem to be anything that would seemingly set the country back as far as making the shift to dollars. I can see the change posing a potential issue for those that may not be familiar with the new currency. In cases of internal financial crisis there might be issues for Salvadorans preferring the native colon as they might not know how to make change or exchange for green backs. Even so, I feel as though overall this decision is beneficial for El Salvador.

The United States should pursue and implement policies that are export oriented and keep the dollar relatively undervalued. Right now, there is much controversy over whether or not the U.S. should pursue a strong or weak dollar. It is important to note this controversy because exchange-rate policies are fueled by interest groups who are seeking to advance their economic statuses. An exchange rate is the price of one currency in comparison to another, and are determined by supply and demand. The determination of how much a dollar can appreciate or depreciate is political decision set forth by government. However, government is vulnerable and accountable to the competing pressures of interest groups. Ultimately, the opposing groups have different policies that will advance their economic gain, these policies are directly contradictory and are dependent on the value of the dollar.

In the past 2 years, the global economy experienced the U.S. dollar increased against other major currencies and oil prices continue its freefall, amongst many other macroeconomic events. Conventional wisdom, which proved to be true, suggests the health of the U.S. dollar has an inverse relationship on the price of imports and in this case a strong U.S. dollar decreases the price of imports. However a breakdown of import prices for consumer discretionary goods tend not to move with changes in the U.S. dollar as foreign firms choose to keep maintain their prices in the U.S. market. Instead, the connection between import prices and the U.S. dollar is reflected by the tendency for commodity prices to fall when the dollar strengthens. As we know, the commodity markets is quoted in U.S. dollars, so it may seem intuitive that when the dollar increase, commodity prices will decrease. Simply, a stronger U.S. dollar directly impacts U.S. inflation which is channeled through falling commodity prices than cheaper consumer goods. Therefore a key factor to consider in anticipating how inflation will be affected by a stronger dollar is the behavior of commodity prices.

since 2000 (Edwards, S., 2005).” As a result of the increase in foreign demand for U.S. assets, Americans have had access to foreign investment enabling the United States to function with large deficits for years. Looking forward, the United States dollar and the economic health of the country is very dependent on foreign investment in U.S. assets. A potential risk looms in the chance that Asian central banks might lower their demand in U.S. assets resulting in a sharp decline in the U.S.

Argument: America needs to go back to the Gold standard to prevent the devaluation and collapse of our current fiat based currency system

Reserve currency is the currency in which large amounts are held by governments or financial institutions as part of their foreign exchange reserves. US dollars play important role in the international monetary It has an effect on global financial markets and government central banks. Reserve currencies are used in international transactions. Citizens of a country that produces a reserve currency can buy imports, cross-border borrowing more and at a lower cost than nationalities of other countries because they do not need to make a currency change. commercial banks around worlds do a lot of their business on the dollars. it gives the countries that opportunity to take the deposit in dollars, extend land also it helps when they have financial

Finally given the slowing economy in Asia the International Monetary Fund (IMF) has reclassified the yuan. Previously the IMF considered it to be “substantially undervalued” compared to other currencies. The IMF has softened its tone toward the Chinese yuan and it is now considered “moderately undervalued”. This new designation makes it harder for the United States government to make a case against and therefore policies to target the imports based on the Chinese yuan. (Davis, 2012)

Deutsche Bank (Karczmar, 2004) suggests that the euro could eventually challenge the dollar as a reserve currency, but the euro is still far behind the U.S. dollar as a reserve currency, representing just 24.2 percent of the world banking reserves in the 2013 third quarter (International Monetary Fund, 2013). Numerous economists endorse the United States’ ability to safely continue its external deficits. Cooper (2001) poses the argument in its simplest form: