By Colin Woolford & Keenan Roche
For a very long time, the United States’ dollar has been the “go-to” currency in the world of trade. In the past, it was more difficult for traders to calculate exchange rates for other currencies. Many traders, businesses, etc. turned to the dollar due to its established dominance in international trade and as a simpler way to come to terms of trade. As a result, the dollar has held a strong position in terms of exchange rates because the demand for U.S. dollars was extremely high from institutions like central banks of foreign nations, where it is common for the majority of the reserves to be in U.S. dollars. More recently, though, the dollar has shown signs of giving way or at least sharing dominance of international trade, specifically with the Euro and the Yuan (China’s currency). In his article entitled “Why the Dollar’s Reign Is Near an End,” Barry Eichengreen writes, “Changes in technology are undermining the dollar’s monopoly.” When traders did not have the technological means to convert a given currency to another, people naturally turned to the dollar. Now, however, he argues that handheld devices and computers can do most everything; the key to coming to terms of trade with foreign currencies is now held in computers if not quite literally in one’s pocket through modern innovations such as smartphones and their economic applications. With China’s growing presence in the global economy putting the Yuan on the forefront of international trade and the seemingly limitless possibilities presented by modern technology, it seems as though the dollar will soon be at least sharing its dominant spot at the top of the international currency pyramid.
In this difficult time of economic instability, the United States has run an enormous balance of trade deficit of nearly $600 billion annually. With unemployment rates near 10 percent, President Obama’s administration has talked a lot about increasing exports in the next five years to almost double what the U.S. exports today, but his administration has done little to make that happen. Twice in the past 40 years has the United States weakened the dollar to help its economy - once by Nixon in 1971 and again by Secretary Baker in 1985. Today the weakening of the US dollar by 10 to 20 percent could generate one to three million new jobs in the US.[1] The exchange rate is an extremely helpful tool that we haven’t used yet and will help the nation enormously. The only way to avoid a double dip recession and bankruptcy is to attack our trade deficit and increase our interest in exports in our foreign policy by weakening the dollar. While it might be easier to see that the U.S. dollar might soon lose its place as the best option for international trade, it seems as though the exchange rates for the dollar is bound to drop, as well. If the Yuan begins to emerge and contend for dominance in foreign trade, it would make sense that central banks worldwide would begin to lessen the percentage of reserves in dollars and begin to hold more reserves in the form of Yuan, and euros, as well. The weakening of the U.S. dollar might sound like terrible news with no positives coming out of it. However, there might be some benefits to the dollar weakening; a subsequent lowering of prices for U.S. goods would lead to foreign buyers looking to the U.S. to buy goods, which would mean more inflows for Americans, and less outflows too, because of the lower purchasing power of the dollar that was explained earlier. More exports and inflows would begin a strengthening phase for the U.S. economy.
Sources
Eichengreen, Barry. “Why The Dollar’s Reign is Near An End.” Wall Street Journal – Foreign Exchange Report. March 2, 2011. http://online.wsj.com/article/SB10001424052748703313304576132170181013248.html
Bergstein, C. Fred. “An Overlooked Way to Create Jobs” The New York Times – The Opinion Pages. September 28, 2011. http://www.nytimes.com/2011/09/29/opinion/an-overlooked-way-to-create-jobs.html?_r=1&scp=7&sq=US%20dollar%20exchange%20rate&st=ce
The Economist. Exchange Rates: Forty Years of Hurt. May 4, 2011. http://www.economist.com/blogs/dailychart/2011/05/exchange_rates
[1] Bergstein, C. Fred. “An Overlooked Way to Create Jobs” The New York Times – The Opinion Pages. September 28, 2011. http://www.nytimes.com/2011/09/29/opinion/an-overlooked-way-to-create-jobs.html?_r=1&scp=7&sq=US%20dollar%20exchange%20rate&st=cse
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