The Future of the US Dollar as the World’s Reserve Currency

When the G-20 met early this year in London to chalk out a plan to mitigate the current financial crisis, British Prime Minister Hailed is as the 2^nd Bretton woods. This implies that the British regime which is the closest ally of the United States (US) is also considering the thought of The US Dollar as the reserve currency.

Economists the world over last year described the present economic turmoil as the ‘most difficult’ crisis since the Great Depression of the 1930s. They are all calling for fiscal action to get out of this recession. And the various governments have obliged too since that seems the only option left. Monetary actions too have been taken but economists seem to bet more on the fiscal side as of now.

Thus we have all become Keynesians now after John Maynard Keynes being the key person in the bretton woods of the 1940s.

It seems history is repeating itself but its needs to be seen whether it actually repeats itself with the world accepting a new reserve currency.

Let us look at a bit of history. The US held the distinct position of being the only country with highest Exports and highest imports. But it imported less costly products such as durable goods and other consumer goods whereas it exported real costly goods such as machinery and technology know-how. Thus its net impact would be positive on the fiscal side.

The Dollar was the reserve currency because of US being the largest market and the most stable Economy.

This has reduced of late and put pressure on its fiscal deficit due to Consumerism and free inflow of money from China which is the largest holder of US Treasury bills.

Moreover with the Emerging Economies i.e. the BRIC Countries (Brazil, Russia, India and China) and the Euro Zone getting stronger and a bigger market, the US market isn’t as good it was earlier.

With the present financial crisis originating out of the US, people are having second thought s about the Viability and Sustainability of the US Dollar as the reserve currency.

The Euro Zone being one of the biggest markets, Euro as the reserve currency could have a sound standing. However the thing on note is that after the crash and liquidity crisis late September 2008, all the foreign institutional institutions took refuge in the Dollar which was seen from the Stock market Indices of emerging economies taking a beating.

But that could be because they knew of the risk-free nature of the Dollar since the Seigniorage (power to print currency notes) benefits that the US enjoys due to it being the reserve currency. So it becomes difficult to deduce as to what is the cause of the refuge, is it the Seigniorage or the fundamental strength of the US economy.

This seems to be the appropriate time to change the reserve currency since the tough conditions at bretton woods are similar if not worst. Timely action is necessary at this point of time.

The US would do its best to try and thwart this attempt so that it enjoys Seigniorage benefits. They will try and use their political clout not only over the other countries but also over the World institutions such as the World bank, International Monetary fund (IMF) where it has the maximum voice through its monetary help.

The G-20 is a small group to decide on it. More countries need to be included in this attempt where the whole world is going to be directly impacted.

Thus the future of the US Dollar as the World’s Reserve Currency seems to under jeopardy which may or may not be good for the world. Only time will tell its efficacy