Future of American Dollar as World’s Primary International

8/6/2019 Future of American Dollar as Worlds Primary International

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Future of

American Dollar

as Worlds

PrimaryInternational

Exchange

Currency

Presented by:

Dixit Bhatta

Merina Shrestha

Sanam Shrestha

Sadichhya Acharya1


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INTRODUCTION

A reserve currency is a currency which is held in significant

quantities by many governments and institutions as part of

their foreign exchange reserves. It also tends to be the

international pricing currency for products traded on a global

market, and commodities such as oil, gold, etc.

This permits the issuing country to purchase the commodities

at a marginally lower rate than other nations, which must

exchange their currencies with each purchase and pay atransaction cost.

It also permits the government issuing the currency to borrow

money at a better rate, as there will always be a larger market

for that currency than others. 2


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Why choose particular currency

key factors that influence the use of a countrys currency for

international reserves are:

> The size of the countrys economy

> The depth, liquidity and openness of the

countrys financial markets

> The stability of the value of the currency

(specifically low inflation) and exchange rate regime.

- In international business the United States dollar is the mostextensively held reserve currency since it met all the key

factors

- The U.S. dollar is the currency most used in international

transactions and is the world's reserve currency and several

countries use it as their official currency. 3


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Rise of US dollar as leading reserve currency

During the 19th century and early 20th century, under the gold

standard, sterling pound was the pre-eminent international

currency

but it was not regarded as international reserve currency gold

was the primary international reserve.

But in early decades of 20th century several factors caused

sterling to lose its dominance which is as follows:

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What caused Sterling to lose its dominance?

-Between 1890 and 1920 US economy gradually began to

replace the UK as the leading global economy in terms of GDP,

trade volumes

-UK ceased to be creditor nation due to the financial burden of

two world wars

-When the post war monetary system was planned at Bretton

woods in1944 and launched with the IMF andWorld Bank as

its core institutions the system was built around the US dollar

not the pound sterling as the key currency of the system with

the dollar convertible to gold at fixed price.

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After post world war II

In the post world war II era most currencies were pegged to

the US dollar. The dollar therefore becomes the key

intervention currency of the most nations and in turn the maincurrency in which other economies held their reserves.

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Why American dollar is considered as

International Reserve

American dollar is considered as international reserve because

of following points:

> Economic size> Creditor status: Britains deteriorating credit

status significantly contributed to the displacement of the

pound sterling and its replacement by the USD.

> Developed financial system

> Available beyond the borders of the home

country

> Full convertibility: American dollar is

convertible to capital and current account transactions.

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Alternatives to the dollar

For a currency to replace the dollar as the preeminent reserve

world reserve currency would require the backing of an

economy as large as the U.S. economy and financial marketsthat are as broad and deep as U.S. financial markets.

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Alternatives

Gold or other commodities:

Why:

- China has already diversified somewhat out of the

dollar by moving to hold large inventories of energy and metals

Why Not:

- No commodity supply grows fast enough to support

money growth adequate for the worlds economic growth

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Alternatives

Yen and Pound: (portrays some similar characteristics)

Why:

- Both have liquid markets for treasury securities

Why Not:

- They are not large enough individually to really

function as reserve-currency jurisdictions and they do not

exhibit political power.

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Alternatives

SDR: Special Drawing right

Why:

- A unit of account that the IMF created and applies to

its internal accounts

- The IMF created the SDR to allow member countries

to effect payments to one another by drawing on their

accounts or quotas at the IMF

- The SDR is exchangeable for a basket of fourcurrencies(the dollar , the euro the Japanese yen and the

British pound sterling) at exchange rates that are reset every

few years

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Alternatives

SDR: Special Drawing right

Why Not:

- At present, the SDR is only a medium of account used

by governments and some international institutions

- It does not serve as a medium of exchange and has

very limited use and potential as a store of value for reserves

- Furthermore it is not as cheaper as dollar to settle the

accounts.

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Alternatives

RMB:

Why:

- Chinas economic size and potential political power

could certainly rival that of the United States, allowing the

Yuan to emerge as a reserve currency

Why Not:

- Viewed in terms of nine criteria for international

currency China and RMB currently only meet the five (unit ofaccount, medium of exchange, store of value, economic size

and creditor status).While the remaining has yet to be met

(developed financial system, network externalities, availability

beyond home borders and full convertibility).

Over the long-term, these doubts could disappear. 17


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Why the next reserve currency may be slow

to emerge?-Every alternative faces significant hurdles to become a unit of

account, a medium of exchange, or a store of values.

-Holding large dollar reserves is a integral part of some

countries economic policies.

- In many cases, the other countrys government uses the

earning to buy U.S. Treasury securities to hold as foreign

exchange reserves.

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Why the next reserve currency may be slow

to emerge?-Some government has decided to accumulate dollar

denominated reserves as a way to boost demand for dollars

and thereby push down the value of their own currencies

against the dollar. By keeping their currencies cheap, these

governments support their export industries, which want to

maintain low prices to their U.S. buyers.

- China and Hong Kong, Japan, South Korea and Taiwan holds

53% of all foreign exchange reserves in the world. Individually,they rank as five of the six largest reserve holders in the world.

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Conclusion

-The dollar has slipped as a store of value as the world worries

about the ability of the repay its debts in the future.

- However the evidence indicates that the dollar remains the

worlds most important unit of account and medium of

exchange.

- Few viable alternatives exist to the dollar and all have at least

some significant from the dollars status and have shown fewsigns of moving away from their dependence on dollar.

- It may premature to conclude therefore that the dollar will

soon lose its reserve currency.20

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Future of American Dollar as World’s Primary International