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Is It the End of Dollar as World's Reserve Currency

  • Date Submitted: 03/25/2013 07:55 AM
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Is it the end of Dollar as world's reserve currency?

What is Reserve Currency?
A currency, held in considerable quantities by different governments, as part of their foreign exchange reserves. It is also used for the products traded in global markets such as oil, gold etc. Reserve currency is also called as ‘Anchor Currency’.
US Dollar as Reserve Currency:
Traditionally, US Dollar has been regarded as the reserve currency and for more than 50 years it has been the currency of choice used by various nations of the world to facilitate trade involving commodities such as petroleum, manufactured products and gold. This stature has had tremendous benefits for the U.S. financial system and the consumers, and it has given the U.S. government tremendous power and influence all over the world. Today, more than 60 percent of all foreign currency reserves in the world are in U.S. dollars. The Dollar became so dominant because of the following reasons:
  * The ease of availability of derivative instruments to hedge dollar exchange-rate risk and this makes the dollar the most convenient currency for corporations, central banks and governments alike.
  * Dollar is world’s safe haven and during the time of crisis investors instinctively returns to it.
  * Dollar gained heavily from the dearth of alternatives.
Threats faced by US Dollar:
There has been a growth of viable alternatives: Euro and Chinese Yuan. With the changing times, market has evolved significantly and today, there is scope for more than one international currency to function simultaneously.
Recently there have been precedents where major oil producing nations have glided away from using dollar and this constitutes a major threat to petrodollar. Apart from this there have been reports from International FI’s like UN and IMF, issuing the need to move away from US Dollar and towards a new world reserve currency.
A lot of this threat emanates from China, world’s 3rd largest economy. Seventy thousand...


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