The Role Of The US Dollar In The Global Economy

Critique a journal article or a book on international relations using the models and concepts learned in the course. If you do so, you should summarize the article’s or book’s argument in a paragraph or two at most, and focus most of the paper on critiquing the article’s or book’s argument. Point out its strengths and weaknesses and critique its explicit or implicit models, theories, and hypotheses.

The Importance of the US Dollar

The dollar is the first currency in the world  and is the most coveted and the leading currency in the world today. However, many people feel that the position governed by the dollar is ending. Despite the waning confidence of people with regard to the value of a dollar, the US dollar occupies pride of place and is widely used by government institutions, corporations, financial institutions and the general public. The international role of dollars gives the United States of America a series of benefits that include seignorage, prestige, policy autonomy, flexibility in terms of balance of payments as well as exchange rate which includes capital.

If the value of dollars go down, or is truly threatened, the government of the United States of America as well as its citizens must give up a crucial resource of wealth, independence and convenience. Without the dollar, the American government will have a tough time sourcing currency from other countries, and that will worsen the economic, and geo political decline of America. For the pessimists, a major reduction in the international role of the dollar international is not merely a prospect but an impending reality. With the rise in the popularity of the Euro, and the rise of China, people are speculating that the time for a multipolar currency order has come. The cost of war and financial crisis has led to the belief that we are witnessing the last era of the American dollar. Economic size of the financial and commercial markets has an influence on the status of the currency of a country and so does political factors. According to economists the importance of dollar can be attributed to the fact that everybody is using this currency. Dollar supremacy is a result of America’s bargaining power, socializing power and structural power.

American hegemony is persistent and the function of the dollar in relation to the four important things, i.e. security, production, knowledge and finance. The combination of America’s financial power, the power of its trade markets as well as power that is there in its military, in the way of ammunition and troops, is the reason why the dollar garners such an important position. The constant pushiness of dollar hegemony is due to the financial capability of the United States of America. In 1971, the United States of America told Saudi Arabia and other states present in the Gulf to state the price of oil in dollars, and not to consider any other notes of any other country in exchange (Shin). In return, the United States of America assured Saudi Arabia safety and security benefits in the form of military presence by America.

The History of the US Dollar

The dollar is a global currency and is considered to be the new gold standard. The US dollar is backed by the American economy which is one of the strongest in the world. The dollar is accepted across the world. After the conclusion of the Second World War, the countries that are developed in the world made a plan in Bretton Woods, New Hampshire (Shin). The rate of exchange for all foreign currencies of the world to the US dollar was fixed. According to the Bretton Woods agreement, the United States of America stated that they would redeem any dollar for its value in gold. However, in the 1970’s all countries began to demand gold in order to combat inflation. In order to prevent Fort Knox from depleting all its gold reserves, the then President of America, Richard Nixon separated the dollar from gold. By then the dollar had become immensely popular as a currency around the world.

The majority of the contracts with the world, especially the oil contracts are denominated by dollars. The Chinese economy, the Malaysian economy, the Singapore economy and the Hong Kong economy peg their currency to the US dollar (Shin).

A global currency is a currency which is used for trade across the globe. There are a few currencies across the globe that are used for almost all financial transactions around the world. The most popular currency in the world is the US dollar, the Euro and the Yen. Among all the reserve currencies in the world, the US dollar is globally the most accepted form of currency and accounts for 64 percent of all foreign exchange reserves at the central banks. Even though it is yet to hold an official global title, it is the de facto global currency of the world.

 The dollar is also used in the foreign exchange market wherein eighty five percentage of forex trading involves the currency of the United States. Additionally, thirty nine percent of the world debt is issued in US dollars because of which banks all over the world need dollars to conduct their business (Bergsten).

The US dollar is strong at present because the FED ended its expansive monetary policy wherein it stopped adding dollars to the money supply. This led to a shortage of dollars being supplied, which in turn increased the value of the dollar (Norrlof). In December 2015, the FED also raised interest rates which further helped to increase the value of the dollar. This meant that the US dollars would attract higher interest rates in the short term. That led to an increase in demand for dollars. Political instability further weakened the Euro which in turn strengthened the dollar.

The US Dollar as a Global Currency

The US dollar has always recuperated in the previous decades from its temporary decline. Even if the euro were to replace the dollar, it would do so gradually and not cause a dollar collapse since that would go against the best interests of everybody. Thus value of the dollar is high as compared to other currencies of the world (Norrlof).

The weakness of the article lies in the fact that it does not address the possibility that the dollar might collapse. A dollar collapse will occur when the value of the dollar goes down which would lead everyone possessing dollar-denominated assets to sell them at any cost. China wants the Euro to replace the dollar for that would give China more control over the global economy. China is gradually working towards ensuring that yuan replaces the dollar (Dollar).

This will be advantageous to China because the Chinese currency, that is the yuan would be used as a currency in contracts between international companies. A lot of products that China exports is priced in American dollars. If these products were to be priced in yuan, then China would never feel the necessity to worry about the increasing value of the dollar. Also it would lead to lower borrowing costs by Chinese exporters. China would also have greater economic power in comparison to America. (Bergsten). It would also strengthen the economic reforms that have been implemented by the President of China.

Due to the policies implemented by Donald Trump, President of the United States of America, the demand for dollars has been going up and down this year and foreign treasuries have seen a decline of about 41 per cent. China who is the largest creditor from oversees, has also pulled back this year. Japan, who is the second biggest creditor, has minimized its share to the lowest level since 2000. The US dollar is declining with the rise of the euro and China’s currency as the primary currency of the world. Donald Trump’s trade wars and Anti-Iran stance is alienating the dollar even more. According to the foreign minister of Germany, it is essential that countries strengthen European autonomy by creating economic channels that are in no way related to the United States of America. Donald Trump’s extravagant economic policies and irresponsible trade and sanctions policies will weaken America’s economy and the position of the dollar in global finance (Bergsten). In an interview with Reuters, Donald Trump accused European Union and China of manipulating their currencies.

The Strength of the US Dollar

Even though the policies of Donald Trump, President of the United States of America, has created uncertainty and friction, it would not lead to countries, to start using other currencies other than the US dollar as their reserve currency of choice especially in terms of crisis because the value of the US dollar  is extremely high. The US dollar is backed by the US economy which is a very strong economy so it would not be in the best interest of countries to replace US dollars with euro or any other currency. The US dollar is the world’s most powerful currency since the past seventy years (Bergsten). Central banks around the globe hold two thirds of the world’s foreign exchange reserves in US dollars. Central banks across the globe hold a large part of the reserve currency in US while it is used for international transactions by private companies. Even though the policies of Donald Trump, push the United States of America out of the limelight, people around the world expect China to fill the growing gap in world finance among other fields. China still has several hurdles to cross before the Chinese currency take over the American dollar. China has a long way to go before it can have a world currency. Controls in capital and a lack of regulations, a lack of transparency which is extremely essential makes investors and financial institutions wary of  investing in China and Chinese assets. At present the dollar still holds the first position (Tuomainen). The US dollar claims more than forty-three percent of the market share with the Euro accounting for approximately twenty nine percent. This shows that the road ahead will be a long one for China before its currency can replace the US dollar.

Conclusion:

To conclude, one can say that the US dollar is a very powerful currency backed by an American economy which is even stronger. Apart from dollars, there is the bond market which needs to be considered, the foreign exchange market and the commodity market. People who use dollars instead of any other currency in the world benefit enormously, which they would not, had they used euro or any other form of currency. Therefore, it is very unlikely that people will resort to euro or any other currency apart from the US dollar and equally unlikely that the euro would replace the US dollar. Lack of liquidity in other currencies of the world contribute to the power of the dollar. The debt market has securities that are denominated in dollars. More than half of the liabilities are in dollars with only twenty eight percent in euro. The market for interest rates are governed by dollars. The foreign exchange market too is dominated by the US dollar with almost half of all transactions being conducted in dollars. The market of the dollar is the biggest and also has a high degree of efficiency. This high efficiency means that there is no reason to look elsewhere for loans and also derivatives.

References

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