Future of American Dollar as

World’s Primary International

Exchange Currency

Presented by:

Dixit Bhatta
Merina Shrestha
Sanam Shrestha
Sadichhya Acharya1
 INTRODUCTION
A reserve currency is a currency which is held in significant
quantities by many governments and institutions as part of
their foreign exchange reserves. It also tends to be the
international pricing currency for products traded on a global
market, and commodities such as oil, gold, etc.

This permits the issuing country to purchase the commodities

at a marginally lower rate than other nations, which must
exchange their currencies with each purchase and pay a
transaction cost.

It also permits the government issuing the currency to borrow

money at a better rate, as there will always be a larger market
for that currency than others. 2
 Why choose particular currency
key factors that influence the use of a country’s currency for
international reserves are:
> The size of the country’s economy
> The depth, liquidity and openness of the country’s
financial markets
> The stability of the value of the currency (specifically
low inflation) and exchange rate regime.

- In international business the United States dollar is the most

extensively held reserve currency since it met all the key
factors
- The U.S. dollar is the currency most used in international
transactions and is the world's reserve currency and several
countries use it as their official currency. 3
Rise of US dollar as leading reserve currency
During the 19th century and early 20th century, under the gold
standard, sterling pound was the pre-eminent international
currency

but it was not regarded as international reserve currency gold

was the primary international reserve.

But in early decades of 20th century several factors caused

sterling to lose its dominance which is as follows:

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 What caused Sterling to lose its
dominance?
-Between 1890 and 1920 US economy gradually began to
replace the UK as the leading global economy in terms of GDP,
trade volumes

-UK ceased to be creditor nation due to the financial burden of

two world wars

-When the post war monetary system was planned at Bretton

woods in1944 and launched with the IMF and World Bank as
its core institutions the system was built around the US dollar
not the pound sterling as the key currency of the system with
the dollar convertible to gold at fixed price.
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 After post world war II

In the post world war II era most currencies were pegged to

the US dollar. The dollar therefore becomes the key
intervention currency of the most nations and in turn the main
currency in which other economies held their reserves.

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 Why American dollar is considered as
International Reserve

American dollar is considered as international reserve because

of following points:
> Economic size
> Creditor status: Britain’s deteriorating credit status
significantly contributed to the displacement of the pound
sterling and its replacement by the USD.
> Developed financial system
> Available beyond the borders of the home country
> Full convertibility: American dollar is convertible to
capital and current account transactions.

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 Alternatives to the dollar

For a currency to replace the dollar as the preeminent reserve

world reserve currency would require the backing of an
economy as large as the U.S. economy and financial markets
that are as broad and deep as U.S. financial markets.

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 Alternatives
The Euro:

Why:
- The euro is an actively traded currency and accounts for
nearly 28% of the world’s central bank reserves
- The euro zone economy is about as large as the U.S.
economy, and its financial markets are broad and deep

Why Not:
- Euro zone’s differences in government deficits and debt
across the member countries
- European Central Bank does not promote the euro as a
reserve currency
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 Alternatives
Gold or other commodities:

Why:
- China has already diversified somewhat out of the dollar
by moving to hold large inventories of energy and metals

Why Not:
- No commodity supply grows fast enough to support
money growth adequate for the world’s economic growth

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 Alternatives
Yen and Pound: (portrays some similar characteristics)

Why:
- Both have liquid markets for treasury securities

Why Not:
- They are not large enough individually to really function
as reserve-currency jurisdictions and they do not exhibit
political power.

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 Alternatives
SDR: Special Drawing right

Why:
- A unit of account that the IMF created and applies to its
internal accounts
- The IMF created the SDR to allow member countries to
effect payments to one another by “drawing” on their accounts
or quotas at the IMF
- The SDR is exchangeable for a basket of four
currencies(the dollar , the euro the Japanese yen and the
British pound sterling) at exchange rates that are reset every
few years

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 Alternatives
SDR: Special Drawing right

Why Not:
- At present, the SDR is only a medium of account used by
governments and some international institutions
- It does not serve as a medium of exchange and has very
limited use and potential as a store of value for reserves
- Furthermore it is not as cheaper as dollar to settle the
accounts.

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 Alternatives
RMB:

Why:
- China’s economic size and potential political power could
certainly rival that of the United States, allowing the Yuan to
emerge as a reserve currency
Why Not:
- Viewed in terms of nine criteria for international currency
China and RMB currently only meet the five (unit of account,
medium of exchange, store of value, economic size and
creditor status). While the remaining has yet to be met
(developed financial system, network externalities, availability
beyond home borders and full convertibility).
Over the long-term, these doubts could disappear. 17
Why the next reserve currency may be slow
to emerge?
-Every alternative faces significant hurdles to become a unit of
account, a medium of exchange, or a store of values.

-Holding large dollar reserves is a integral part of some

countries economic policies.

- In many cases, the other country’s government uses the

earning to buy U.S. Treasury securities to hold as foreign
exchange reserves.

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Why the next reserve currency may be slow
to emerge?
-Some government has decided to accumulate dollar
denominated reserves as a way to boost demand for dollars
and thereby push down the value of their own currencies
against the dollar. By keeping their currencies cheap, these
governments support their export industries, which want to
maintain low prices to their U.S. buyers.

- China and Hong Kong, Japan, South Korea and Taiwan holds
53% of all foreign exchange reserves in the world. Individually,
they rank as five of the six largest reserve holders in the world.

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 Conclusion
-The dollar has slipped as a store of value as the world worries
about the ability of the repay its debts in the future.

- However the evidence indicates that the dollar remains the

world’s most important unit of account and medium of
exchange.

- Few viable alternatives exist to the dollar and all have at least
some significant from the dollar’s status and have shown few
signs of moving away from their dependence on dollar.

- It may premature to conclude therefore that the dollar will

soon lose its reserve currency.
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