Wednesday, October 14, 2009

Challenges Rising Against US Dollar as the Global Currency

The value of the US dollar and gold saw fluctuations in the global markets over the past week. The price fluctuations followed a report by The Independent, a British newspaper, quoting an unnamed source, that the Arab Gulf oil-exporting countries held a talk with major oil consuming countries like China, Russia, Japan and France. They were considering an end to the use of the dollar in buying oil, and instead opting for a basket of currencies consisting of yen, yuan and euro, as well as gold.

That report immediately caused the dollar to become weaker against other major currencies. In the meantime, the prices of gold increased rapidly and fuelled speculation that the prices would exceed 1,100 dollars an ounce in the near future.

Dollar in Oil Purchase and Sale
The countries mentioned in the report came out to deny there was no such discussion and they insisted on continuing with using the dollar in oil purchase and sale. In the meantime, analysts pointed out that it will not be easy to stop using the dollar in oil transactions as there are many obstacles to overcome, particularly for China to have to allow its yuan to become more flexible in value.

The US dollar has come under severe attacks because its value has seen a continuing decline since the United States suffered from a serious economic recession over a year ago. Early this year, there were calls from China and Russia for countries of the world to adopt the International Monetary Fund (IMF) system of currencies basket to replace the US dollar as the principal global currency. They cited concern that the dollar was gradually decreasing in value, which would result in reduced value for assets held in the dollar term.

Fluctuating Exchange Rates
In the recent meeting of the Group of Seven (G7) major industrialized countries issued a statement expressing concern about the weakening value of the dollar, a decline of 14 per cent this year when compared to six other major currencies of the world. The statement also said that the fluctuating exchange rates and the movements in value that do not correspond with the basic economic factors are undermining the stability of the foreign exchange markets and the global economy.

It is not easy for other currencies to replace the US dollar as the global currency, given the facts that the US is the world's largest economy and the international trade is mostly done in the dollar term. Most international reserves are also in the form of the greenback. Even though the euro has been rapidly rising in value, the combined size of the euro economies and the popularity of the European currency remain a distant away when compared to the US dollar.

Safe Investment Alternatives
However, the unified pressure from other superpowers against the US dollar should not be overlooked. If all those countries agree to reduce their asset holdings in the dollar term, the greenback's value will see a sudden nosedive. It is true that other currencies cannot match the US dollar, but the traditional safe investment alternatives like gold will greatly benefit. Then, oil prices will shoot up regardless of the currency used for transaction.

The US Government is trying hard to restore confidence in the country's currency and to retain its status as the No 1 economy of the world. There are new challenges from rising stars like China, which just celebrated the 60th anniversary of the republic's establishment and has expressed its determination to become the next world leader.

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