The Weakening Position of the Dollar in the World Economy

The Weakening Position of the Dollar in the World Economy

As if the current struggles with skyrocketing national debt, the mortgage and lending crisis, and the increasing consumer credit burden weren't enough to strain the United States economic system, as well as that of the world, yet another potentially damaging fiscal problem is on the horizon. Approximately 66 percent of the world's currency reserves are held in US dollars. Thus, when the dollar loses value, it affects the world, as their currency reserves also lose a percentage of their worth. As the US dollar struggles against the sinking of its value, there are some nations are giving serious thought to setting it aside.

"This is the first time in my career that I am really worried about the dollar," said Stephen Jen, who is the head of currency research at Morgan Stanley, according to a November 7, 2007, article published in the Financial Times. "I didn't know it was going to go so far. The dollar is in trouble. What has so far been an orderly move can easily degenerate into a more violent event."

During the week that the Financial Times article was published, the value of the dollar slid further, resulting in a record low against the Euro. And, that's not the only record low the dollar set. The US dollar hit a record low against the Canadian dollar, as well, and the British pound and the Australian dollar, too. With all the uncertainty in the US economy, other nations are beginning to feel a bit frightened by the potentials of a dollar collapse and are starting to be concerned about the amount of money they have tied up in US investments. Add to those nations the countries who are none too pleased with the policies of the United States of late, particularly relating to the war in Iraq and the whispers of war to come in Iran, and there are more than a few nations that are giving real thought to setting aside the US dollar.

One of the contributing factors to the downward slide of the dollar in the early part of November was the vice chairman of the standing committee of China's National People's Congress, Cheng Siwei, stating that China's currency reserves need to be diversified, and more of it invested into Euros, rather than dollars. With that nation holding more than $1 trillion in currency reserves, that is a move that has the potential to be devestating to the already weakened US economy, which recently hit a national debt record high of $9 trillion.

While China is the largest, it is far from the only nation to reconsider the position of the dollar as a reserve currency or investment vehicle. In September, according to an article published in the Telegraph, written by International Business Editor Ambrose Evans-Pritchard, "Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East."

It should come as no surprise that Iran is less than pleased with dealing with the US dollar. According to a September 17, 2007, article published by Bloomburg.com , Iran has requested that Japan pay for oil in yen, instead of dollars. Venezuela is looking at other alternatives as well, both because of ongoing animosity between he and the president of the United States and as a purely practical matter, in light of the current economic situation in the United States. Many nations are beginning to view the US dollar in terms of risk. Other nations that are beginning to look for alternatives to the US dollar include Russia, South Korea, and Sudan. More than a few of these nations have already taken steps to reduce their US dollar holdings.

The affect of such financial moves could potentially be devastating to the US economy, particularly when piled upon an already staggering burden of economic problems. While, admittedly, there's not a lot that the average citizen can do about such things in a broad sense, it is possible for the average person to take steps to try to protect himself from the myriad of economic challenges that lie just over the horizon. It is a good time to get serious about debt management and getting personal finances in order. It may be a good time to review investments and to reevaluate the risks associated with those investments, perhaps even to consider other investment options. The important thing is to be alert and proactive in stabilizing and protecting financial health and future security.