The Dollar Is Still King

Hantu Laut

In November 2008 I wrote on the dominion of the US Dollar in world trades and currency reserves after some pundits predicted the crash of the dollar and its eventual replacement with other currencies. Below is the relevent article:

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. Read more.........

Below is a recent article written by Philip Bowring of Asia Sentinel:

Hostage to the Dollar
Although everybody would like a different reserve currency, the once-almighty dollar will probably prevail

Positioning and propaganda in the lead-up to the recent G20 meeting in London are at last focusing attention on the role reserve currencies play and the dollar in particular. But change is going to be very hard to achieve.

China has been in the forefront of this by arguing for a greater role for International Monetary Fund units of account, Sor pecial Drawing Rights (SDR) and a big new issue of SDRs. It has also begun to prepare the ground for its currency, the yuan, to play a role by agreeing currency swap deals with central banks of several countries including Malaysia , Indonesia and Argentina. And it has publicly raised concerns about the safety of its US investments in the wake of massive bank bail-out and stimulus deficits to which Washington is committed.

The US, for obvious reasons, is less than keen on changes that would reduce the role of the dollar and hence its ability to fund its deficits in its own currency. Europe may like to see a greater role for the euro but is worried that any move out of the dollar would push the euro too high and damage its trade, and the cautious Germans in particular are worried that a big SDR issue would simply boost future global inflation.Read more.......

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.