Global Imbalances and the Dollar's Future
The large current account deficit of the United States, the growing foreign holdings of US treasury bills and then the recent financial crisis that erupted in the US have led to a revival of the question of the worth of the dollar as a reserve currency. Those who say that it is time for the dollar to go, are not basing their argument on the greater strength of another currency to replace the dollar. Rather, the most popular alternative is the Special Drawing Right of the International Monetary Fund, which is more a unit of account than a currency and whose value is itself linked to that of a weighted basket of four major currencies. There are three implications of such an argument. First, even when the weakness of the US and the dollar is accepted, the case is not that the dollar should be completely displaced, since even in the basket that constitutes the SDR the dollar commands an influential role. Second, there is no other country or currency that is at present seen as being capable of taking the place of the US and the dollar at least in the near future. And, third, the search is not for a currency that can be used with confidence as a medium for international exchange, but for a derivative asset that investors can hold without fear of a substantial fall in its value when exchange rates fluctuate, because its value is defined in terms of and is stable relative to a basket of currencies.
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