Despite the global recession originating in the US economy and even as the debt crisis still looms large on it , the United States currency dollar still remains powerful in the global economy . In fact in the wake of the recent developments, the global confidence in the strength of Us dollar is declining. The global capital and the countries with surpluses are looking out for safer investment destinations. This exerts severe pressure on dollar leading to its wide fluctuation in its value. Despite these challenges, the US dollar still remains powerful not because of its strength but because of the fact that there seems no immediate alternative to it as an international reserve currency . What factors drive us to this situation?
Most of those who want the dollar to go are not suggesting any other currency as an alternative. But, the popular alternative suggested is the Special Drawing Rights (SDR) released by the International Monetary fund (IMF). But, there are inherent weaknesses in the SDR of IMF. Firstly it is not a currency. It is only a unit of account. The value of this unit of account is calculated based on the weighted basket of four major currencies. The US dollar still plays a dominant role in the SDR of IMF.
But, the SDR seems to be not in a position to pose any serious challenge to US dollar in the imminent future though countries like China publicly voice their support to SDR. Noted economist C.P.Chandrashekhar explained the reasons for the inability of SDRs of IMF to replace US dollar in the near future. There is no strong country to back SDR. The value of SDR is weighted average of four currencies dollar, pound, sterling, Euro and Yen. Thus any country can keep all these four currencies rather than SDR. In fact such a strategy shall give that country more manoueuvrable space. T he total volume of SDR s released so far is worth only 317 billion dollars. But, the total global surpluses are 6.7 Trillion dollars . Therefore the quantum of SDRs available constitute only a small proportion of total global reserve holding . Even country like China can buy the entire SDRs . Even these limited SDR s available will be distributed to different countries. The IMF can release more SDRs only with an agreement of countries having at least 85 percent IMF quota. But, only US has 17.77 percent of IMF quota. With which it can veto any decision to increase the quantum of SDRs in circulation. As SDRs are distributed among nations , the countries having high surpluses may not get the SDRs even if they want to buy. Finally as of now SDRs are exchanged in transactions between central banks but not among governments and private companies. These limitations of SDR make it ineffective as a financial asset that can be an alternative to dollar though there is strong desire for an alternative to dollar.
The competition to dollar came when Euro was launched on January , 1, 1999 . There were wide expectations on Euro as an international currency that would replace dollar’s supremacy . But, this did not happen. There are several reasons for this. Firstly, Euro is not the currency of any particular country, but it represents European Union. Therefore , there is no strong originating country to back this currency. There is still no political unanimity in Europe on the Euro. There are inequalities in the levels of growth and economic strength among the member countries that constitute Euro. In fact, the political, economic and military clout of Europe has declined in the post Second World war period.
The dollar today accepted as an international reserve currency and as a currency for international transaction. Noted economist C .P.Chandrashekhar in an incisive analysis on the future of dollar in the global currency market explains that a combination of factors contribute to the strength of a currency to be the international currency. First, the competitive strength of the economy in which the currency originates, , the confidence in the strength of the state to ensure that the value of the currency it backs would be stable to goods and resources in general, finally , the willingness of others to accept the currency in payment . However history suggests that it is the confidence in the state rather than the competitive strength of the economy it governs that is crucial for generalized acceptance of a currency as a reserve. There seems to be no other country is nearer to United States in this regard despite the economic downturn and downgrading of its sovereign rating. This is precisely the strength of the US dollar. Not just the economic strength of the US, but the military and political supremacy of United States which determines the relative strength of its currency. Though several economies like that of China and India which are emerging as strong economies, there is no immediate rival to the military and political dominance. This is precisely the reason for much of the international trade done in dollars and the world’s super rich and the countries having huge surpluses would like to stock their finances in dollar denominated assets. Thus the world’s rich and the world nations have a vested interest in keeping the value of the dollar not to decline terminally. The historical experience suggests that the periods of steep fall in the value of dollar was followed by remarkable revival in its values . As long as the structural weakness in the US economy continue , the dollar has to derive its strength from the weaknesses in the international financial eco system rather than it own mettle. The real alternative to US dollar and establishment of a more stable and broad based international reserve currency can not be possible without restructuring of international political and economic order .
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