The US dollar is considered one of the two most dominant reserve currencies in the world, along with the Euro. Together, they make up 90 percent of the allocated reserves in the world. Basically, international markets rely on the US dollar for purchasing certain commodities, such as petroleum and gold. Central banks and monetary authorities rely heavily on the currency for their foreign exchange reserves just to keep foreign exchange transactions alive and well in various parts of the world.
Indeed, the demand for the US dollar as a reserve currency is what makes the global financial market working like a machine. As long as other nations are able to have a steady stream of US dollars towards them, the US dollar would still hold on to its status as top reserve currency, with Euro being the second. Eswar S. Prasad, the former head of the China division of the IMF or the International Monetary Fund, stated in his book that the US dollar still remains as such because of it having no other competition. It was even believed that it would be knocked off from the top spot with some other currency, but because of the decrease in the supply of safe assets, the US still provides for safe financial assets through US Treasury securities.
Other nations within the world economy, however, beg to differ. In fact, there are those who say that the US dollar is facing competition from top economies, the most vocal of them being the People’s Republic of China. The world’s top exporter has long been critical of the US for its “debt addiction” and political instability, which is why it is calling for a change in the currency for the world to use in trading, in buying gold and petroleum, and in just about any transaction within the global financial market. Indeed, China is going for the move to finally dethrone the US dollar.
For a very long time now, China has been urging the US to protect its dollar investments, which analysts say account for a large percentage of its $3.2 trillion in forex reserves or else it would have no choice but to look for other sources of investments for its reserves. Also, it recently entered a very large currency swap agreement with the Eurozone and the United Kingdom, which is a big push to making the Chinese yuan a top world currency. It does not also help matters knowing that China is buying the debt of the US, with the former owning $1.3 trillion dollars of it.
Imagine the US dollar losing its reserve status. It could very well cause an economic downfall on a world scale, wherein foreigners hastily get out of the dollar currency by converting it or putting a bid on the value of US goods as they try to get rid of their holdings in dollars. For now, the US dollar being the major currency used all over the world is still up there. Unless the sole economic superpower makes the necessary actions to overcome its problems, it is possible that the US dollar may be dethroned sooner than later.
About the Author
An experienced and well-regarded authority in the realm of finance and investments, Jeffrey D. Arsenault has been in the business for more than 25 years. He is currently the owner and principal of Old Greenwich Capital Partners, an investment management firm based in New York City.
