Posted by: changholt | September 29, 2011

The US dollar and the international community

Has the almighty US Dollar seen its last days as pillar of international monetary system?

Just this past month, the US dollar has increased almost 20% against the Brazilian Real. What’s next?

According to many sources it has. Then the question is “what’s the alternative“? Is it the Japanese YEN? Is it the Euro? Is the Chinese RMB (Yuan)? No its not. Most experts, and myself included do not think the US dollar will be displaced as the standard for international business transactions,  but it’s up to us to ensure that is not happened. We need to make sure the United States maintains a fair trading system and is always seen as a transparent place to do business… A good place to invest.

I believe these calls for reform are a direct plea or challenge to the US government to get it financial house in order…. and stop printing money! China is the largest owner of foreign reserves in the world and wants to keeps it economy (and their government) stable. They see all the US dollars they’ve purchased slowly devalue. “The financial crisis has fully exposed some shortcomings in the international currency system,” said Chinese Deputy Foreign Minister Yafei. “Of course we hope that in the future, the international currency system can diversify.” In other words, make me feel comfortable about holding all this USD!

What is the diversified alternative? What some countries are calling for is Special Drawing Rights (SDR). To understand SDRs you have to understand the International Monetary Fund (IMF).

The IMF was created in 1944, designed to oversee the fixed exchange rate system. More recently, the IMF lends money to countries that experience difficulties with their balance of payments—loans usually accompanied by conditions to which the country has to adhere to, such inflationary controls.
To accomplish these objectives, the IMF manages/controls an artificial currency called a “Special Drawing Rights” (SDR). In essence, the e SDR’s worth is determined by a basket of four currencies (U.S. dollar, European euro, British pound and Japanese yen), but never became popular with businesses. The SDR designed to supplement the U.S. dollar in its role as the international currency, but never achieved its objective….. and probably will not work in the future. It’s up to the US to rebuild confidence in the almighty dollar.

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