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Alternative International Reserve Currency to USD - A Compilation Work

Alternative International Reserve Currency to USD - A Compilation Work

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Published by raamz
This is a compilation based on the work authored by different researchers across globe.
This is a compilation based on the work authored by different researchers across globe.

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Published by: raamz on Mar 12, 2011
Copyright:Attribution Non-commercial

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01/28/2012

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Alternative International Reserve Currency to USD-
 
Compilation Work 
 
Page | 3
1
 
Introduction
Many countries
particularly developing and oil-exporting nations
haveaccumulated huge foreign exchange reserve after a series of financial crises in 80sand 90s. Countries have taken measures to prevent their currencies fromappreciating against the dollar and other countries, have built buffers againstbanking turmoil after they were adversely affected by global currency crises in 1997-98. Reflecting the comparative advantage of the U.S. in providing broad, liquid,
transparent financial markets, the lion’s share of these reserves is in dollar
-denominated assets. Between mid-1995 and mid-
2005, the People’s Bank of China
maintained a fixed peg between its currency, the renminbi, and the US dollar, by
buying the dollars rapidly flowing into China through trade and investments. China’s
foreign exchange reserves, 65-70% of which are in dollar dominated assets.
The IMF estimates that 64% of the world’s official foreign exchange reserves are held
in dollar denominated assets. The euro, the second most widely held internationalreserve currency, lags well behind, followed by the British pound and Japanese yen.The
dollar’s status as an official reserve currency reflects its broader role as the key
international currency. According to a survey conducted in 2007, roughly $3.2 trillionworth of foreign exchange trades hands each day, and 88% of those transactionsinvolve dollars. Naturally, the gains of a single currency rise with the number of producers, since it simplifies a wider range of price comparisons. The dollar hasmaintained this role over the years, despite substantial fluctuations in its exchangevalue because the size, sophistication, and relative stability of the US economygenerally render the costs of transacting in USD lower than the costs of transactingin other currencies that do not equally share these characteristics. A strong and openUS financial
system helped facilitate the dollar’s international use. Nevertheless, US
financial markets have always been innovative and relatively free of cumbersomeregulations. They offer many different types of financial instruments and welldeveloped secondary markets, which enhances the liquidity of dollar dominatedassts. All this makes holding dollars convenient and transacting in dollars relativelyeasy. As more and more people use dollars in international commerce
as the globalnetwork for dollars expands
the benefits of using the dollar in exchange rise. Thenetwork benefits of an international currency becomes substantial, people are proneto continue using it.Presently, there is a vacuum created in international affairs due to the decline in themoral and economic stature of the United States. It is a vacuum because no othercountry or organization has the credibility, legitimacy and capability to fill the gap.This is particularly true in monetary and financial affairs. By default, the U.S. dollar is

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