World Financial Environment - Essay Example

The US dollar is undoubtedly the largest global currency. Most of the goods and services around the world are valued in dollars; and much of the international transactions are paid in dollars (Daniels, Radebaugh and Sullivan, 2007). It is quite evident that the President Obamas unprecedented expenditure plans would bring in millions of dollars of budget deficits and consequently increase the US national debt level by more than two-fold in the next five years. Hence, presently there is a common speculation that the dollar is moving for an all-time new slump and a probable collapse (Will the US Dollar Lose "Reserve Currency" Status?, n.d.). As a reserve currency, the dollar is expected to be stable.

However, the fluctuations in the dollar value and exchange rates give a different picture all together. The economic meltdown and the global financial crisis occurred due to the financial imbalances shooting from the vast deficits in the US current account and the sever pressures arising from the accommodative monetary policy of the US that affected the exchange rate evaluation across the globe. The US dollar had the tendency to depreciate considerably with respect to the other floating currencies.

Since most of the international Therefore, with most of the international transaction being carried out in dollars, some nations arbitrated in their foreign exchange markets to limit currency and monetary precariousness so as to sustain domestic financial stability. This resulted in an increase in the dollar prices of several commodities and a further escalation in the reserve accumulation (Mohan, 2009). Due to the continuous depreciation in the value of the dollar, concerns have cropped up with regard to its status as the global economy’s reserve currency (Faux, 2002).

On the one hand, the unexpected fiscal and monetary policy reactions have resulted in heavy