Monday, November 24, 2008

Will The US Dollar Crash And Be Gone ?

Hantu Laut

Will the US dollar crash and become an insignificant currency? Some pundits have predicted that the use of the dollar would decline and eventually be abandoned as an international currency.

At the moment the dollar is the most important international reserve currency.Many countries pegged their currency to the dollar and some even used it as their de facto currency.It is the currency used most in international trade transactions.Most countries kept their international reserves in dollars.

I believe the world is not yet ready to abandon the dollar or move to a multi-currency monetary system.The next most important currency after the dollar is the Euro which had taken over some of the dollar's role but were not big enough to displace the dollar significantly.Even Airbus, a consortium of European corporations still uses the dollar in its pricing.

Click to enlarge

The above chart shows the percentage of global currencies. The currency that has the potential to replace the dollar would be the Euro.A complete replacement is not envisaged in the near future.The Euro, successor of the German mark which used to be the second most important currency after the dollar had taken a bigger role in foreign exchange reserves.The dollar still maintained a leading role in being the most important currency.

About 64% of foreign reserves are still held in dollars.The importance of the dollar came about after the Bretton Wood Agreement to adopt a monetary policy that maintained an exchange rate of each country's currency within a fix value - plus or minus 1% - interm of gold.

In 1971 the Nixon administration abandoned the Bretton Woods system without consulting members of the international monetary system or even with his own State Department.This was later to be known as the 'Nixon Shock'

The US suspension of convertibility from dollars to gold created a situation whereby the US dollar became the reserve currency of all the nations that had signed the agreement.

You can't trust the US, can you, when its interest is at stake it will do anything including breaking international agreement.The Iraqi War is another example where it failed or refused to respect international law, going to war without UN Security Council approval.

With the current financial meltdown in the US which have affected other nations many people expect the dollar to lose some of its value.Strange as it is the dollar had appreciated against many major currencies.Against the Euro it has strenghtened to 1.26 as at 22 November.The rate before the meltdown was hovering around 1.57.

The US budget and trade deficit are worrying signs that it may not be able to meet its financial obligations and the dollar may take a heavy beating making it worthless.It has happened before under Nixon will it happen again? The US keep printing its currency to be sent overseas to finance its war and trades?

The ideal situation would be to have two major currencies.The Euro would be the only potential currency that can fulfill the need not to be fully dependent on the dollar.

A good start to bring other currency into international transactions is to switch some of the petrodollar to Euro and eventually introduce the Euro into other international trade transactions and currency reserves.

In the meantime, the dollar is still king.


Jed Yoong said...

oh did you receive that mass email predicting the doom of the US and the birth of a new currency called "Amero" of the new country which will include Mexico and Canada?
lots of "noise" floating around.
the US $ can't crash, China, Russia, Japan are stuck with US Treasuries, sneaky eh?

kittykat46 said...

At the first hint of trouble with the Ruble, Russian traders bought dollars by the billions. And their President just a few months ago was contemplating refusing to accept Dollar payments for their oil.

The Dollar will likely remain the premier currency for as long as the US remains the world's largest economy, but other currency denominations will increasingly be used.

The removal of the Gold standard in the 1970's was a bleasing in disguise, though it created short term chaos.

The global monetary system before that was more stable, but also more static. Old folks can tell you that the inflation rate picked up considerably since the 1970's - that's not a coincidence, but real world economic growth has also picked up.

Just prior to the latest financial meltdown, the world economy has been wealthier than it has ever been in history. The serious Unequal distribution of wealth between and within countries is a separate matter.

Hantu Laut said...

Jed Yoong,
Yes, It's the mad Hall Turner.It's a good scrip for a movie.

Hantu Laut said...

Like it or not,the dollar will be around for quite a while.