Amid chaos of the present economic conditions and aggressive measures taken by the Government to overcome the financial crisis' have triggered caution on dollar position as global benchmark currency.Nations holding huge US dollars surpluses intent to diversify their currency reserves with alternate global currency or mixed currencies basket other than US Dollar.
Determining Exchange Rate
Like commodities, Dollar exchange rate against other currencies are determined by demand and supply, In case of more buyers than sellers, the dollar will strengthen and in opposite situation, the dollar will weaken.
At present, liquidity shortage in US economy is keeping the dollar prices higher and currency markets are quite jittery. On 25th March 2009, U.S. Treasury Secretary Timothy Geithner sent the dollar plunging when said that he was open to China's proposal for a greater role for IMF’s (International Monetary Fund) Special Drawing Rights.
The Dollar affect
Governments of many developing countries consider large dollars holding as a hedge against the negative affects of economic crisis. They believe in the strength of the dollar over their own currency. As economic defensive measure, developing nations keep their currencies pegged to the dollar .
A pegged or, fixed rate is a rate Central Bank (As Government Authority) sets and maintains as an official currency exchange rate. A predetermined price set against major currencies (usually the U.S. dollar, but also other currencies such as the euro, the yen, or a basket of currencies). The central bank buys and sells its own currency in the foreign exchange market to maintain fixed rates in relation to the pegged currency.
Alternative Currency! - Fact or Melodrama
China’ which already counter blamed (in response to currency manipulation allegations) Americans for their higher spending and low savings, expressed strong concerns on dollar instability as a benchmark currency.
The concerned list includes central banks of China and Russia as well as large private investors and the Wealth Funds. Many of them from Asia, including the Chinese Funds’ those might lose billions in the current financial turmoil.
In fact, none other than China suffered the most after Americans due to current crisis. U.S. as a biggest exports market of China also provides rapid growth momentum to Chinese economy. That led some experts to assume Chinese concern little melodramatic.
Worried Dragon
With massive decline in export figures and over 23 million unemployed workers, it can make more economic sense for Beijing to let their currency (Yuan) depreciate, to make sure that its exports remain cheaper. What caution Chinese is the value of its huge investments in US Treasuries and other dollar dominated securities, with total sum around $2 trillion approx.
Counter Allegations
In review of Dollar/Yuan exchange rate, certain voices from US keep accusing China of currency manipulation. Many people wonder on lack of efforts from US administration to prevent currency manipulation, while China simply denies the US allegations.
The truth is, due to the absence of any international agreement, which require different nations to determine their exchange rates in a particular fashion, there is no straight way to stop the manipulation practice carried out by any country.
Conclusion
If you believe that the recent concerns regarding dollar prices are nothing more than a melodrama to pressurize US authorities to act harder for economic recovery, for the old golden days of higher consumer spending that helped developing nations to grow rapidly! You better think it again, because you could miss the complete picture, the desperate efforts of protection have already been started. The whistle blowers actually got hurt and much severely this time.
Dollar as global benchmark currency, also bring several systemic risks generated by domestic economic problems and policy mistakes from issuing country. Trust in the U.S. dollar dwindled because of huge current-account deficits, troubled banking sector and constrained monetary policy to overcome the current recession.
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Dollar Exchange Rate Currency Pegged Economic Manipulation Benchmark US China Yuan Exports Funds Holding Global Allegations Bank
