The U.S. Dollar
With the U.S. deficit spiraling to over $30 trillion, many people wonder if the U.S. dollar will continue to be the currency of the world. It seems as if it would be logical for this to not be the case given current fiscal affairs in the United States.
This has been a continuing concern for decades and yet the U.S. dollar remains the currency of the world. Although the U.S. certainly has economic issues, the rest of the world is not so great as well. This creates a best of the worst scenario.
We expect the US dollar to continue to be the reserve currency of the world. A recent article highlighted that very issue. You can see the link here:
“This is why the US dollar is the most widely used currency in third-country transactions – those that don’t even involve the US. In such situations it’s called a vehicle currency. The euro is used mainly in the vicinity of Europe, whereas the US dollar is widely used in international trade among Asian countries. Researchers call this the dominant currency paradigm.
The convenience of using the US dollar, even outside its home country, is further buttressed by the openness and size of US financial markets. They make up 36% of the world’s total or five times more than the euro area’s markets. Most trade-related financial transactions involve the use of short-term credit, like using a credit card to buy something. As a result, the banking systems of many countries must then be at least partially based on the dollar so they can provide this short-term credit.
And so, these banks need to invest in the US financial markets to refinance themselves in dollars. They can then provide this to their clients as dollar-based short-term loans.
It’s fair to say, then, that the US dollar has not become the premier global currency only because of US efforts to foster its use internationally. It will also continue to dominate as long as private organisations engaged in international trade and finance find it the most convenient currency to use.”