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Death of Dollar: How

Real It Is?
Presented By:
Rupesh Gaikwad 164
Shreyak Shah
184
Suvrat Dayal
202
Vinayak Sanil
221

Flow of Presentation
Introduction
History
Current Scenario
Conclusion

Bretton Woods System (1944-1971)


US

Dollar accepted as a universal


Reserve Assets.
Gold Convertibility Clause.

Reasons For Decline


Vietnam

War (1967-71).
Doubts in International Markets.

Petro Dollar War


After 1971 US cut
Countries needed

a deal with OPEC.


dollar reserves to

buy oil.
Iraq started selling oil in Euro (2000).
US invading Iraq (2003).
Revert sale of oil in Dollars.

Subprime Crisis

Whats wrong with the


dollar ?
Greenback

resumes its slide.


Apprehension about the gaping U.S.
federal deficit and/or fear of runaway
inflation ?
U.S. trade balance in goods &
services.

Increased risk tolerance


outflow of short-term funds
Net

capital inflows have been


negative most of this year.
Combination of a modest trade
deficit & net capital net capital
outflows from U.S. has exerted
pressure on dollar.
U.S. short-term T-bill purchases
jumped to $380 bn in second half of
2008.

contd
U.S.

banks lent billions of dollars in


good times to foreign banks but
tightened credit lines when crisis
began.
Foreign banks were forced to
scramble for dollar liquidity.
This contributed to dollar
appreciation between July08 to
March09.

contd
As governments took steps to stabilize
global financial system, investors become
more tolerant of risk again.
FI now in search of high yields elsewhere
often in their own countries.
Depreciation of dollar this year: unwinding
of one-off factors that led to its
appreciation.
Spike in risk aversion led to FI seeking to
invest in U.S. T-bill.

Net inflows of long-term securities


weakened
Behaviour of net purchases of long-term
securities has also contributed to
pressure on the dollar.
Purchase of foreign securities by U.S.
investors was in negative in second half of
2008.
Foreign purchases of U.S. long-term
securities weakened.
In first seven months of 2009, FI bought
$279 bn vs $462 bn at same time last
year.

contd
Weakening

in sale of U.S. corporate


bonds by FI reflects net sales of
securitized fixed-income securities.
In contrast, foreign purchases of U.S.
stocks strengthened from $28 bn in
first seven months of 2008 to $78 bn
so far in 2009.

contd
As

per FRBNY, foreign central banks


continue to buy Treasury securities.
These holding have increased to
$300 bn since March09.
Since March09, FI have bought $143
bn of long-term Treasury securities.

Conclusion
At end of June08, foreign holding of U.S.
Treasury notes & bonds totaled $2.2 trn.
Foreign central banks hold nearly ($1.7trn)
half of marketable supply of long-term
Treasury securities outstanding.
What can reverse dollars recent slide ?
A return of risk aversion
Higher rates of return on dollar assets
will attract capital inflows
dollar