Down But Not Out

With the US caught in a deep recession and mired in deepening debt, the status of the US dollar as the world’s reserve currency is in question. Should these questions appear warranted, a crisis of confidence could create a “self-propelling spiral” weakening the dollar further. And if the dollar were to plummet, intervention by not only the US, but also other economies could be the response. But US officials still favor focusing on fundamentals that drive currency values rather than sentiment. Indeed, the consensus remains that a dollar crisis is highly unlikely. While the official US government stance is one of promoting dollar stability, many observers are skeptical given the massive amount of the debt the US needs to fund bailouts, stimulus packages, and health care reform. Importantly, many ask which currency can take the dollar’s place. Hence, any shift away from the dollar is likely to be toward a “basket approach” of many currencies – but that would be a decades-long process. As in most aspects of the global economy, all things are connected. The role of the dollar as a reserve currency will likely change in accord with how the US’ role vis-a-vis the world’s other large economies changes. – YaleGlobal