American Dollar is Still the King – But For How Long?

Something happened in November 2008, which had not happened at any time before in history. An upstart Euro, which started to be used as the official currency in some 17 countries in Europe in as late as 1995, upstaged the megalithic US Dollar. The euro had been earlier adopted by the financial markets in 1999. The US Dollar slipped from the high pedestal and lost its numero uno position as the world’s premier currency in circulation to the Euro in November 2008. The significance of this happening was not lost on anyone.

The Euro was valued first at 1.18 against one dollar. It started losing ground fast. The trend continued until it plummeted to 0.8 per one dollar in October 2000. When the national currencies of member countries of European Union were replaced by the Euro, it took a roll reversal and started appreciating steadily. It achieved parity with the dollar in July 2002. It has since risen in value. Its career graph shows it surpassed its initial value in May, 2003 and hit 1.3 against dollars. That was the time when dollar was going through its difficult phase and was losing against all major currencies. After a period of uncertainty, Euro again rose to its highest value of $1.5 in July 2008 but plunged back to $1.25, though still higher than its initial value. As of now, i.e. Nov 2009, it stands at a respectable $1.48.

The American Dollar is truly the international currency exchangeable anywhere on the Earth. Countries like British Virgin Islands, Bermuda and Equador either use the dollar as their official currency or along with their national currencies. Still others, like Lebanon and Iraq have notified the dollar as their de facto currency.

To return to the tickling question of Euro gaining an upper hand internationally and replacing dollar, there are all kinds of speculations flying around. The downward trend took shape during President Nixon’s time when the administration started spending more money than it received as revenue. The OPEC came to its rescue and made up for the deficit. It also bought US Treasury Bonds. Japan followed suit and unloaded its substantial financial baggage in the US to buy the Bonds.

Euro-denominated bonds are in circulation and are posing a real threat to US Bonds. OPEC is looking to invest in Euro bonds. This will complicate the matter further for the dollar and the interest rates in the US are bound to raise. This is because the demand is increasing enormously and the supply may not be forthcoming from Japan and the OPEC.

Let this not dishearten the Americans because the world economy will completely collapse without dollar holding its prime position. At least that is the perceived position for now. The economies of the world will not like to be left in the lurch and left holding the bag. But for how long?

Source by Asokan Ponnusamy

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