Pratibimb | April 2011
Dollar as the world‘s reserve currency - Is it helping ? Rahul, TAPMI Alumnus
I
t was after the second world war that the UK sterling lost its power as the world‘s reserve currency and the world leaders convened at Brenton Woods, to decide on a new financial and monetary policy for international exchanges. It was here, in the Brenton Woods Summit, that the dollar was chosen as the reserve currency. Dollar was backed by gold , and 1 ounce of gold was worth $35 in 1944.
stimulus it has provided to various banks. Most of the countries now are hesitant to accept dollar as the reserve currency in wake of the recent US borrowings and the economic turmoil in 2008 which is likely to depreciate the dollar further and increase its inflation. The recent happenings have also seen various countries raising demands/debates over the feasibility of dollar being the world‘s
Since then, the dollar enjoyed a free run in the world markets and for nearly six decades. It was the currency which every nation in the world wanted to fill its forex reserve with. These dollar reserves created a hedge for them against their own presumably less stable currencies. As for America, it enjoyed having a currency which could be, and was over evaluated to buy assets in other countries and not needing to go to the other sources of borrowing. The dominating reserve currency also meant that every major commodity in the world market was traded in dollars, which helped to maintain constant demand for the American Dollar. Being the issuer of the reserve currency helped America greatly in becoming the largest creditor nation in the world and almost every country in the world had two-third of its forex reserve in US dollars. But this was when everything was all hunky dory for America and it could do no wrong. Things have changed in the last 10 years and more so, in the last 2 years which also saw a major recession in the economies world over. In 1999, almost 71% of the world‘s official forex exchange reserves were denominated in Dollars; today the figure stands at 63%. US is also now the largest debtor nation in the world with the debt being almost 10% of its GDP standing at $10.6 trillion. The US government also has plans to double its debt in the next 5-10 years owing to its large bail out plans and the fiscal
reserve currency with the BRIC nations even demanding that the dollar be replaced with a ―supranational‖ currency. Their demand is lead by a vociferous China which ironically is the largest holder of the US dollar with $1 trillion lying in its banks. It makes for an interesting study as to why China, will want the dollar to be replaced when it 36