Journal Entry Week 3 - Essay Example

first Journal Entry – Week 3 The Eichengreen (p.53) attempts to discuss about the fluctuating dollar value in international markets. This article highlights various issues that resulted in the dollar fluctuation and how international investors vie to secure their investments in the best possible manner. This article makes specific reference to the 2008 recession and identifies reactions from different countries towards their dollar reserves. The author asserts that emerging markets hold good potential for investment in foreign exchange reserves.

To invest in dollars, most of the foreign central banks opt for US debt securities due to their security and relation with the US government. In the past, lower interest rates and easy credits were the causes for financial instability, seen in the US. Before this instability crept in, the US held relatively larger share in world economy for many years and the dollar rose to occupy international currency status. Many other nations were also affected financially due to the crises of the US in recent times.

In order to minimize crises, many other nations are striving to bring their currencies to the international currency status; but their large holdings of the dollar reserves in the US securities are limiting their movement upwards. Moreover, the author argues that attainment of such a position would require too many transformational reforms as well as much political, economical, and trading support from within and from neighboring nations. Eichengreen’s argument is important and worth caring as it highlights so many different perspectives and issues of other countries that have relatively major stake in the dollar reserves.

These nations’ decisions would ultimately impact the dollar and future of the long-dominated United States. For instance, competition for this status existed earlier. The Sterling Pound and Swiss Franc competed for the status of international currency, but their comparatively lesser share held them back. Japan’s national policy related to its currency and domestic markets held the Japanese Yen back from international market. Their economic reforms too are not favorable for this option.

Another serious competitor is the Euro. The Euro area’s stock is diverse with varying returns, risks, and degrees of liquidity. German debt securities lack liquidity. Other Euro areas are challenged with various financial problems, including Italy which is the richest source of bonds. Put together, the euro areas possess comparative amount of bonds as that of the US, but these countries do not take such risks. The shaky dollar has in turn strengthened euro, and with more countries adopting the euro its strength would only increase further.

For Euro to gain strong ground at international level, the other East European countries need to integrate into euro area, which will take much longer than anyone can expect. Russia has increased its euro reserves and reduced its dollar reserves between 2008 and 2009. About 60% of China’s reserves are in dollars, but the Chinese are losing faith in dollar securities. If China decides to withdraw its dollar reserves, then the dollar would further depreciate, which would further reduce China’s residual holdings.

By doing so, China would deter its relations with other countries also. News about China vying for international currency status for renminbi also seems to be true considering its actions, decisions and struggle to get best possible valuation for its dollar reserves in the US securities through leveraging reforms of International Monetary Fund (IMF) committee. In short, this article by Eichengreen is an informative piece on dollar fluctuation at international level and of the fact that its competitors are struggling to take the position; yet, dollar’s strength that the US has built over last few decades still remains.

Effective reformation in the US trade, government, and regulations can help retain its position whilst keeping an eye on competitors’ strategies and also adopting better trading practices with emerging markets. Works cited Eichengreen, Barry. The Dollar Dilemma: The World’s Top Currency Faces Competition. Foreign Affairs, 2009, 88(3): 53-68.