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What does the future hold for the United States dollar?
For those of us who live in Cambodia it’s a burning question. After all many of us are being paid in dollars and pay our way in dollars. It’s also a topic that has been receiving a lot of attention in the press recently.
So, why is the dollar receiving all of this attention recently? To begin with there have been some wild swings in the value of the dollar against some of the major currencies.
Some two weeks ago the dollar posted its biggest one day fall since 1985 against a basket of major currencies. The falls came as the United States Federal Reserve announced plans to try to revive the American economy by buying treasury bonds. This sent alarm bells ringing raising concerns that the Fed’s action would lead to an oversupply of the dollar which would in turn trigger a sell-off.
This was compounded by the fact that China and Russia have called for a drastic change to the global monetary system. Both nations have urged that the dollar be replaced by a single global currency.
Indeed Russia is intending to put forward a proposal for the creation of a new global currency to replace the dollar at the G20 Summit in London on Thursday.
So where does all this leave those of us with dollars in our pockets and bank accounts?
It really depends on who you ask.
If you were to ask United States President Barack Obama, for instance, he would tell you that the dollar will be the world’s reserve currency for the foreseeable future. Indeed White House spokesman Robert Gibbs has said exactly that. He said in a recent press conference ‘the dollar will be the reserve currency for a long, long time.’
Should the dollar remain the world’s global reserve currency (which appears likely despite noises from China and Russia) then the theory is that it will be in even more demand. This will decrease the supply and increase the demand and its value will remain high – and that’s good for those of us holding dollars. It’s not so good for American companies whose goods will be more expensive in foreign markets.
However, there is another train of thought. And this one suggests that the US dollar could overheat and possibly crash as a result of an unprecedented, excessive demand for the currency as a safe haven. This will obviously decrease the value – which is not so good for those of us with dollars but very good for United States companies with goods to sell overseas.
Other theories also abound. Some believe that the Chinese – who have the world’s largest currency reserves (in the region of USD $3 Trillion) – cannot allow their biggest asset to fall and that they would do everything in their power to prop it up. This will also keep the dollar up.
The Chinese, however, are also said to be concerned that the recent moves by the US Federal Reserve to buy treasury bonds could serve to devalue the dollar and it is for this reason that they are calling for the move to a global currency. This very same sentiment could see China – and others – choosing to buy gold. This would obviously have a negative impact on the dollar – but a positive effect on gold.
So, for those of us with dollars in our pockets we should be prepared for a bumpy ride. After all it appears that the dollar – like many other of the world’s major currencies – will not be immune from the volatility that has plagued the stock markets.
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