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The Greenback

World economies are experiencing massive changes. The US economy seems to be heading towards a recession. In such a scenario, We once again witness a worldwide debate on whether the Euro will overtake the US Dollar and become the global currency for exchange or not.

The US dollar has long enjoyed the benefits of its monopoly as the invoice currency in almost all foreign trade, being the preferred official intervention currency and the principal official reserve asset.
With the appearance of recessionary elements in the US economy and a significant and persistent fall in the value of the dollar in the past few months, several financial pundits opine that the euro will soon win the war for supremacy. Notable examples are those of the UAE, Russia, Switzerland and Venezuela, countries which are shifting more of their currency reserves away from the dollar. However, this can also be rebutted by sharing the perspective of several currency experts that the central banks of these countries are simply doing what investors typically do to minimize risk, that is , diver sifying portfolios.
It must also be remembered that that when the euro was first introduced back in January 1999, the US dollar managed to preserve its credibility as the international medium of exchange outside Europe. The advent of the common currency did increase invoicing in euro at the expense of the US dollar. However, despite its success in unifying financial markets within Europe, the euro has still not significantly displaced the dollar’s central role in the world’s financial and foreign exchange markets as many had anticipated. Between 2000 and 2005 the dollar lost more than 25% of its value against the euro and the quantum of international reserves held in euros rose from 18% to 24%. The dollar’s share fell from 71% to 66% The euro has clearly made some progress during this period but this does not signify a revolutionary regime shift as yet. Moreover, further fall in the value of the dollar is not in the interest of most countries and foreign investors due to risks of devaluing huge investments in US securities.
The dollar is still the key currency of trade in about 90% of foreign exchange transactions.
According to several recent analyses by the US media, the dollar does not face any immediate threat to its supremacy, despite its declining value. The euro’s exchange rate against the dollar has reached an all-time high in the recent past and central banks have increased the euro share of their international reserves. However, the dollar is still the dominant official reserve asset of governments. Developing countries hold more than 70% of their official foreign exchange reserves in dollars.
Other than the United states (which holds negligible official reserves in foreign currencies) other industrial economies hold over three-quarters of their official reserves in US dollar.
The dollar is intricately linked to international trade. It is the medium of exchange for every commodity. Be it sugar, wheat or oil. According to the European Central Bank, 80% of the exports from Indonesia, Thailand and Pakistan are invoiced in dollars, even though less than a quarter of these exports are to the US. Brazil accounts for about 40% of the world sugar exports (almost none of which goes to the US), but the sugar trade still takes place in dollars. This is due to the fact that the global commodities’ markets quote their prices in dollars. In the realm of worldwide primary commodity trade, there is no evidence of switching away from dollar invoicing anytime in the near future.
In addition, a majority of countries export a large number of goods and services to the United States. As a result, there is a regular flow of dollars into their central banks. In such a scenario, it will be difficult to reduce the share of dollar in reserves and this can only be done if these countries stop exporting to the US, which is an unlikely (and undesirable) prospect.
To sum up, the world is not ready to substitute the dollar with any another currency, which has been the central facilitating. Currency since 1945, Such a shift would require a complicated restructuring of the global financial system and few nations are prepared to undertake this Herculean task at the moment. Monetary instability and low product differentiation are factors favoring the dominance of the dollar as vehicle currency.
The only likely outcome at this point, if the slide in the dollar continues, is that the share of the green-back in the reserves held by central banks may decrease further. However, countries are not likely to price their products in another currency such as the euro, even if it is presently more stable. Although indications and risks of euro being adopted as the invoicing currency should not be completely ignored, the dollar seems to be safe for at least another decade or so.

By Hussain Ali Talib

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