Dollar Instability as World Reserve Currency - Essay Example

This scenario is about to change (Lorimer n.p). Though the mainstream media in the U.S. has been abnormally silent about this, truth is that some of the big economies on the globe are making agreements with each other to shift from using the U.S. dollar in international trade.  Currently, some oil producing countries have begun selling oil in non U.S. dollar currencies. This is a huge threat to the petrodollar system that has been in place for almost four decades.  In addition big international organizations such as the United Nations and IMF have started advocating for the need to move away from the U.S. dollar adopt a new world reserve currency.

The operation of the U.S. dollar as a world reserve currency is under threat and the impending shift in international trade will have massive implications on the U.S. economy. There are several reasons as to why countries want to get rid of the U.S dollar as a reserve currency. First and foremost is the instability of the dollar. Big economies such as China already hate having to rely on the U.S dollar. The Federal Reserve’s monetary policy that is notably loose and the rapidly rising public debt of the U.S. are troubling officials concerned with international trade.

There is fear that the stimulus measures that were adopted to revive the U.S.’s flagging economy will soon generate a high inflation burst that will further weaken the dollar. Such an occurrence would be detrimental to holders of US government bonds, including China. China has about $2 trillion of its $3.2 trillion currency reserves held are in dollars most of which is in bonds. The U.S. has also lost its triple-A credit due to failure to come up with credible plans to cap its public debt (The Economist).

In addition, China as the second largest economy on earth with projections that it will pass the U.S economy by 2016 and be three times larger by 2040, it is difficult for China to continue using the dollar in its economy (Lorimer n.p). China together with other emerging economic powers such as Russia, over the past several years have been quietly making agreements that will see them shift from the use of the U.S. dollar when conducting international trade. The economy of the U.S. is continuously fading.

This is going to make it difficult to argue for the U.S. dollar to continue functioning as the primary reserve currency of the world. An indication of the changing fortunes of the dollar is the recent deal between China and Japan that promotes the use of their currencies when conducting bilateral trade. Currently, they do their trade in U.S. dollars but the instability of the dollar has necessitated such an intervention. In addition to this, another emerging block referred to as BRICS comprising of Brazil, Russia, India, China and South Africa is also planning to move away from U.S. dollar based trade.

The block proposes to create a credit facility that will enable these countries to use their local currencies in trade. For over a year now, China and Russia have used their national currencies when conduction bilateral trade (Lorimer n.p). The growing use of the Chinese Currency in Africa is an indication of a process that is already in motion. In 2009, China overtook the United States of America as Africa’s biggest trading partner. Many African countries therefore prefer to use the Chinese yen in trade With China so as to reduce transaction cost incurred in acquiring U.S dollars. It is approximated that 70,000 Chinese