Threatening Key Currency Status of the United States

As WWII ended, the common consensus was that there is need for a global currency. The target of this currency was to help spur global economic growth and help bridge the gap between traders from different countries. The US dollar has done this service diligently to the world but it is time we asked questions. Is the currency still holding its own or does it require a replacement, in which case, which currency would this be?

Trade Deficits

Owing to the use of the US dollar, the United States contributes half a trillion dollars annually to global trade through deficits. The United States injects this deficit to among others; global growth demand, employment and output. However, some countries and trade zones benefit more from these trade deficits than others do. The Euro Zone and Japan combined take about $600 Billion of the annual trade income from all other countries of the world.

While it is evident that the Euro Zone benefits from the trade deficits, this is one of those zones most critical about the dollar. Concocted in the 1960s, Europeans claim the use of the dollar as a global currency gives America ‘exorbitant privilege’. The main thorny issue here is that the USA is able to pay its bills in its own local currency.

The irony however is that the same Europeans that condemn the privilege America has do not look at the other side of the issue. The United States has a net foreign debt of $10.6 trillion. Much of the world’s economic growth results from this foreign debt by the US.

Deficit without Tears

Many of the critics of the United States will jump on the opportunity to say that the United States does not care. Comments by the Fed last week strongly support the argument that the US doesn’t care. The Fed stated that the US can continue holding the debt ‘without tears’ because it’s a key currency country. It is interesting to see what politicians and critics alike will pick from this. This is especially critical considering the growing sentiment that the US should not have so much foreign debt.

What many market observers expect is that politicians will argue why the US is critical of the trade deficits by China and the European Union. This seems quite hypocritical looking at the current situation that the US is in.

Dethroning the Dollar

Looking back to last year August, the cumulative amount of US Treasury Bills and Bonds as well as notes held overseas stood at $6.9 Trillion. At least two thirds of this was part of foreign currency reserves. Additionally, in the last two years, world dollar reserves shrunk by 3% up to 61.6%. This systematic decline has seen the reserves decline from 70% in 2000.

The only sure way not to dethrone the dollar as the world currency is for the USA to stop using it as a runaway tool for its debts and the deficits checked. Lastly its use as an economic warfare tool stopped.