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Wednesday, February 20, 2013

Will the U.S. Dollar remain the go-to global currency?

The dollar's legacy as the go-to global currency has been challenged
Increases in money supply rises and weak economic performance devalue the dollar

By Vida Denning

According to the Wall Street Journal, of all the big eight currencies, the U.S. Dollar is the reserve currency used worldwide by all banks. All international banks have up to 60% U.S. Dollars making up their hard cash in bank reserve currency.

There is a belief that even though the U.S Federal government still backs U.S. debt and the economy backs the Dollar itself, the world economy should not rest entirely easy.

The general consensus is that between budget deficits and the monetary expansion policy, the varnish of the USD has dulled a bit. So the question is; will the USD remain the go-to trading currency for the next half a millennia?

USD History

For many years the U.S government has always tied the USD to a metal except for the Civil War period. However after the war, for the following years, the Dollar was tied to gold, which was the fundamental financial structure for the States, and other currencies relying on the solidity of the USD.

The famous 1933 stock market crash caused the Great Depression which saw 11,000 banks of 25,000 go under. The Federal Reserve was unable to effectively co-ordinate the demand for money with the actually reserved amount thanks to the extremely high demands for cash. The States couldn’t simply make more money because it would flow out of the country, and be converted into other world currencies. It would lower interest rates and it would not be synonymous with the outflow of gold.

It was during the Depression that the tie between the gold standard and the USD was replaced with quasi-gold, making this applicable only to international transactions. Through the years this standard has been maintained, but now there is huge concern about the States’ inability to reasonably service its own debt, which puts the Dollar in a precarious position as the go-to currency for worldwide investors.

Currently investors and global governments are losing faith in the United States ability to manage its budget deficit which is currently sitting at $1.1 trillion, and the U.S. Congress continue to each budget deficit, which means the national debt is rising and people are losing faith and looking to other currencies to be the go-to currency. There is speculation that the Euro will be next in line to the currency throne.

As the EU has survived its darkest hours in terms of several countries being forced to implement austerity measures, the strategy has worked and many are climbing out of the financial hole. This serves to show that the Euro is being considered amongst the strongest of all currencies to be the next favoured global trading currency.

About the author: Vida Denning is a prolific freelance writer with a Forex account, and a keen interest in the details of the big eight trading currencies.

Image license: US-PDGov