Many say the US Dollar is finished and that it will be replaced by emerging market currencies. But how true is that?
Lets delve in
- THE USD is the most traded in currency in the world with 44% of the $6 Trillion FOREX market being exchanged in dollars.
- Global central banks hold around 59% of their reserves in the USD . It provides stability and liquidity value.
- Majority of the worlds commodities such as oil and gas and metals are priced in the USD.
- Foreign Commercial banks hold dollars onto their deposits known as eurodollars. This allows savers to hold foreign currency and transact in. Assuring them of their money staying stable and not being eroded by inflation.
Bretton Woods agreement
- USD became the worlds reserve currency after WW2 after the Bretton Woods Agreement came in effect with 44 allied countries signatories to that. Foreign currencies became pegged to the price of the dollar and allowed easy conversion between the two. As Euro nations ran out of money they deposited gold into the US banks and got back USD to finance their post war efforts. New institutions such as the IMF and World Bank were created to assist war ruined and poor countries to develop with loans .
- Trading USD allowed worlds central banks to regulate their money supply
- Foreign countries would buy US treasuries as a way to store their dollars and keep up with inflation. The nations could redeem their USD for gold for $35 an ounce.All of this demand for USD have increased its value.
- Many countries saw this unfair as they had to produce goods and services in exchange for them purchasing USD treasury bills to regulate their inflation and foreign trade.
- In 1971 the US with President Nixon got off the gold standard so they could easier issue debt to finance their growing deficit due to the Vietnam war. Many countries such as France,Switzerland and West Germany also left the system to support their own currencies and demanded their gold deposits back.
Major currencies
The main competitors to the USD are the majors YEN,EURO,AUD,CAD ,YUAN,RUBLE,SWISS FRANC,BRITISH POUND .These currencies do provide a valid competitor to the US Dollar.But they cannot replace it long term as majority of these mentioned currencies are exporters and their currency value is volatile.Chinese Yuan gets depreacited by its own central bank to keep the yuan competitive for exports . Russian Ruble is reliant on the price of oil and gas and therefore volatile. Australian Dollar and Canadian Dollar as commodity exporting currencies, the same as Russia, so their price too is reliant on the commodities prices.The Euro is the biggest solid competitor to the USD as it comprises of euro economies which are all different in its own way. One weakness of the euro is that the EU is facing an economic decline ,so its cant be a formidable opponent to the USD.The Swiss Franc is controlled by its central bank who can in times of strength interfere and weaken the currency to keep it from getting too strong.
So after our analysis we can conclude that the USD is still the king currency and has no competitor.
AUDUSD-CADUSD Comparison with an OIL WTI chart at the bottom.They 2 pairs follow oil price in line
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