Dynamics of the International Foreign Exchange Market - Essay Example

Your Section: (9:30, 12:30, or 2:00) Briefing paper or 2) Related Chapter: (10) The Dynamics of the International Foreign Exchange Market and the Likelihood of a Substantial Shift Outline: Introduction Overview of Existing system and history/theory that underpins it Contents I: Challenge to current system A: The danger of a post –dollar world B: Potential for major economic shift and re-direction II: Benefits of the Existing system A: What would change? B: How would future hegemony of the dollar be determined in a collapse of this standard III: Potential for change A: Contributing factors B: Likelihood and relevance of a post-dollar economic foreign exchange system Conclusion Summary of main arguments and conclusions Introduction: Since the establishment of the Bretton Woods system in the late 1940s, the United States dollar has set established as the international currency or exchange. Although it is inherently true that currencies are often traded without trading the dollar, this dynamic is one that pervades the system and defines for the vast majority of monetary transaction and exchange of currencies around the globe. However, the high level of debt that the United States government represents has discouraged many nations around the globe from the viewing the United States dollar as a safe bet and/or as a reasonable mechanism for the international system of foreign exchange to be based upon (Friedman, 2014). This is obviously a relevant and extraordinarily important issue for the reader to consider; due in part to the fact that the power and wealth of the United States is predicated upon the US dollar remaining in the position of the currency of foreign exchange and international reserve. With this in mind, the following discussion and analysis will be concentric upon discussing the reality and gravity of the threats to the current system and what likely outcomes and potential impacts this could have at both a systemic level as well as a more localized level for corporations interested in maintaining relevance and success within the current market space. Contents: Currently, both the Russian Federation and the People’s Republic of China are in high-level talks with regard to stepping away from the United States dollar as the global reserve currency and potentially establishing a new system that would bypass this long-standing legacy. In the eventuality that these talks are constructive and the combined economic power of these two extraordinarily powerful nations is able to craft a new global monetary system, the overall power that the United States might otherwise hope to affect around the world would be drastically and immediately reduced. Essentially, the United States has been able to exhibit nothing short of a monetary monopoly over the past 65 years (Hong, 2013). This monetary monopoly has allowed for the United States to engage with developing nations, set the interest rate upon which loans will be paid, and ultimately determine what resources around the globe should be priced at (Schuman, 2014). Whereas the free market still works within this particular scenario, the ability of the United States economic system to be a price maker as compared to a price taker is indirectly and directly impacted upon as a direct result of the dollar being the international currency of foreign exchange. If one were to consider for a few moments what the world might look like if there were indeed a basket of currencies or alternatives to the dollar’s current hegemony, the end result would be a situation in which the United States wealth and power around the world would be drastically, immediately, and inherently reduced. Although this would necessarily reflect poorly upon the overall opportunities and abilities of individuals and businesses operating within the United States to express their power in a global sense, it would potentially be a massive benefit to companies and nations elsewhere around the world that had been standing in the shadow of the United States hegemony and the dollar’s reign as currency of foreign exchange for a very long period of time (Schuman & Linshi, 2014). Likewise, in terms of overall perspective on the issue, it is the opinion of this particular student that the reign of the dollar is something that is patently unfair and likely to have caused a great deal of frustration, anger, and irritation within parts of the world forced to accept the global system of finance that has been foisted upon them. In many ways, the opinion of this particular analyst is divided on this subject; due at least in part to the fact that the system has greatly contributed to the wealth that the United States has been able to exhibit; while at the same time benefiting certain regions of the world disproportionately as compared to others (Clausen, 2008). Further, as this level of frustration and angst has built throughout the world, it is only reasonable that individual nation states will seek to develop a new paradigm of global finance that circumvents the hegemony of the United States dollar (Applebaum et al. 2003). From a strictly economic standpoint, the reader can understand that a monopoly, regardless of who may be in charge, is ultimately a negative economic situation and one that does not promote the overall benefit and utility of stakeholders within the system. Likewise, even if the Russian Federation and/or China were able to develop an additional or corollary foreign-exchange structure through which the United States dollar may become less relevant, even though this would create a hardship for individuals within the United States and the overall power structure that America is able to wield over much of the rest of the world – it would be a net benefit for many stakeholders as they would have an alternative (Sesit, 2007). In light of the information that has been presented thus far, it is the opinion of this student that governments, companies, organizations and individuals should pay close attention to the way in which the situation unfolds within the coming years and months (Sharma, 2008). Firstly, in terms of the way in which nations approach the issue of the dollars hegemony and the likelihood of their being alternatives to the World Bank and other fiduciary agents, delaying loans and/or weighing potential likelihoods of alternatives within the coming years is a primary approach that nations should consider (Shumsky, 2014). Likewise, as organizations and companies are more interested in the foreign-exchange aspect of this particular issue, it would behoove such entities to hedge their currencies in favor of not maintaining their resources within a single currency or a single nation’s financial system. Naturally, this is only good business and is the recommendation that such companies would likely promote from an international standpoint whether or not the issues related above were of fundamental importance (Rinegold, 2010). Conclusion: Expecting that the current system will remain in effect in perpetuity is shortsighted and ultimately juvenile approach to the issue. As a direct result of the fact that the power of nations and individual organizations is in perpetual flux, the hegemony of the dollar and the impact on foreign-exchange is not something that is guaranteed. Instead, it is likely that the coming years will see increased contributions from the BRICS (Brazil, Russia, India, China, and South Africa). As these nations develop and present more of a unified challenge to the United States established system, it is likely that collaboration and cooperation between these countries could establish potential alternatives to foreign exchange and the means by which the global economic system is classified. However, it should also be noted that even though the United States dollar is under increased threat, it is unlikely that any nation itself could present a realistic alternative to the United States dollar and/or impact upon the means by which foreign exchanges facilitated. This is of course due to the fact that the current United States economy is so extraordinarily large it would take a joint cooperation such as the one which has been discussed at length within this analysis to affect such a change. Signature of Individual work: Honor code statement and sign References Appelbaum, B., Ewing, J., & Gough, N. (2014, October 3). U.S. shares in dollar’s wealth. New York Times. pp. B1-B6. Clausen, A. (2003). Concerning the dollars strength. Vital Speeches of the Day, 39(14), 439. Friedman, N. (2014, November). Strong dollar adds to pressures on oil. Wall Street Journal (Online). p. 1 Hong, N. (2013, August 12). Doubts arise over strength of dollar. Wall Street Journal - Eastern Edition. pp. C1-C2. Rinegold, J. (2010). The great betrayal: Learning to speak Euro and Yuan in the coming post-dollar world. Kirkus Reviews, 78(6), 238-239. Sharma, S. D. (2008). The Rising euro and sinking dollar: Explanations and implications. Mediterranean Quarterly, 19(2), 11-18. Schuman, M., & Linshi, J. (2014). Revenge of the dollar. Time, 184(19), 20. Schuman, M. (2014). The Strength of the U.S. dollar reflects global economic reality. Time.Com, N. pag. Shumsky, T. (2014, September 18). Gold extends losses on dollar strength, FOMC. Wall Street Journal (Online). p. 1. Sesit, M. R. (2007, May 12). Traders caution the U.S. currency may have peaked. Wall Street Journal - Eastern Edition. p. C1. Read More