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RIVALRY OF CURRENCY

Analysis Materials 25 October 2005 11:04 (UTC +04:00)

Could the reign of dollar in the world fiscal market continue its way in the stable crisis stripe? Such issues have become evident immediately after the dollar started dropping in its value in regard to other world currencies. Over the past 30 year the dollar has gone suffered considerable depreciation. During the last depreciation, which started in 2002, dollar fell 28% in regard to euro and 14% in regard to basket of other world currencies. The same time 66% of official world currency reserves are represented in this currency, whereas the shares of euro, yen, and pounds are 25, 4, and 3% of world currency reserves respectively.

Nevertheless, the analysts skeptically regard the prospects of dollar, and assert that this time the crown of dollar even if not shake, decline. The deficit of the current account lf the US payment balance comprises 6% of the GDP, or the record in the history of the country. The US net international assets (22% of the GDP) attain the pick of the historic maximum.

The central banks of different states reduced the purchase of US securities. Over seven months of 2005 the amount of purchases grew $2bn against $295bn in 2004 and $175bn in 2003. If the tendency continues, other currency unit could give a dare to the dominating dollar.

The history only one bright example when the replacement in the reserve currency linked with the transition from the British pound to the US dollar. Two wars and consequent two depreciation of the currency in the Britain enabled the dollar to take up n the world reserve currency market.

Major rival to the US dollar is euro. The reserve currency requires the currency which it represents to have a great share in the world production, trade and finances. In this respect the US economy still dominates, while the euro-zone strongly yields. The amount of trade in the euro zone with the rest world is almost the same as the United States. Almost half the trade is implemented in dollars.

The fiscal market of the country which represents the reserve currency should be deep, open and developed. The Unites States leaves behind the euro-zone for many indices, while the establishment of the unified currency would assist in uniting the European fiscal markets.

Confidence in the currency is also an important requirement, and it coincides the period when critical notes on dollar are based serious arguments.

Am employee of the California University, Beckerli Barry Eichegreen, in his recent research urges that the preservation of the role of world reserve currency mostly depends on US’s own policy. If the Unites States leaves deficit this year on the current accounts of the payment balance in the high level and provides the net international assets to rise, the foreign investors will have less will to reserve dollar assets. It will result in depreciation of dollar, giving rise to inflation pressure in the Unites States and making the dollar reserves less attractive, even in case of increase of the rates.

Indeed, it is difficult to foretell such dynamic with any level of exactness. The dollar needed decades to displace the British pound. Besides the euro-zone has some evident economic weakness. The same time some experts even think over whether euro could exist to resist 20 years to rival with dollar with consideration of the inactive state of the pact on stability and rise in the declination from the euro-construction of France and the Netherlands.

Besides, Eichengreen suggests the world, after all, could have more than one reserve currency. In this case dollar will have to share its status, as other currency units could be more attractive. However, as the financial markets in other countries are more liquid, its effect will be weak an other currencies will gain more confidence.

The process favors euro. There big doubt in respect to other currency candidates, particularly, yuans, claiming at the role of reserve currency. Both Europe and the United States have strong institutes, respect to the right of ownership and macroeconomic policy clear to other world countries. Control over the movement of capital, non-liquid and non-transparent financial market, indefiniteness around the right of ownership in China makes yuan unfeasible rival within the decades.

Finally, the scientists concluded that the possible loss of the authority of dollar or compromise of part of share to other reserve currency depends on Unites State�s will of continuing the currency economic policy, which could finally damage its position. Even if the Unites States change the rates, the USD will have to yield part of its leadership, the scientists stress.

Author used data indicted in The Economist

Magazine while developing the article

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