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Business First Issue2 Vol5 CH10:Layout 1 23/10/2009 14:54 Page 62
Foreign exchange
Will the financial crisis claim its biggest victim
- the Dollar?
W
inds of change are sweeping global economics eastwards and paradox. Any prolonged selling by China would result in a collapse in
leave a faltering US economy propped by government stimulus value of the dollar and reduce the value of their holdings.
behind. This has reignited debate from resurgent China in The Chinese have consistently made a sensible argument for a second
relation to the role of the US Dollar as the global currency of choice. This world reserve currency to replace the greenback. This has found
has contributed to a weakening Dollar and have ignited the debate over support elsewhere, most notably an agency of the United Nations, and
its future. more recently an alleged agreement between France, Japan, Brazil and
Talk of the US economy at present is peppered with ‘green shoots’, V the Gulf States to abandon the use of dollars when pricing oil.
shaped recoveries and stabilisation. Stock markets are on the march, so The dollar remains, and is likely to remain, the sole reserve currency.
why then would the debate about the dollar develop now? Rising stock The Euro remains an additional candidate. However, the monetary
markets mean people are prepared to take risks again and US investors union lacks the bite of fiscal union (ability to harmonise government
will sell the USD in favour of riskier overseas investments. debt and expenditure) and this is unlikely to happen. Any sovereign
In the US, closer examination highlights a crisis that began with too default within the Eurozone would also scupper its chances.
much private debt held by individuals and companies now being One credible idea mooted is the use of the IMF’s Special Drawing
played out by too much public debt held by the US government. The Right (SDR). The SDR is a basket of currencies including the Yen, Euro
US government admitted that the budget deficit would be $2,000 and Sterling. China has backed this idea and so far put its money where
billion higher than forecast over the next 10 years, nudging it towards its mouth is, purchasing $50bn in March. However, this is a limited
$9,050 billion (or $9,050,000,000,000!). It is evident that the green shoots basket and would probably do better by including a further mix of
have dead roots. Is it any wonder holders of dollars are concerned? emerging currencies.
The Chinese Premier Wen Jiabao has admitted he is “definitely a little It is clear that the global economy needs an alternative to the dollar
worried”. With $2.1 trillion held in assets and a further $776 billion in and its falling value is one testimony to this. However, global trade is
Treasuries he should be. China has quietly reduced its exposure by synonymous with the dollar and while the SDR contains a narrow band
offloading some US Treasuries since June this year, but herein lies the of currencies it is unlikely to oust the dollar from its dominance just yet.
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