Dollar as the global currency: how long will it last?

Forex market analysis depends on the notion that price movements can be predicted. Usually, this principle has solid foundations in historical data, and experience, but once a while there are periods when everything seems so confusing that predicting anything in forex can be like predicting the outcome of a coin toss. The recent extremely turbulent period of market action is one such phase where market trends are very hard to differentiate from market volatility. And as the status of the dollar as the global reserve currency becomes a subject of speculation in this environment, it is all the more harder to discern what is logical and what is not in the various scenarios presented.

Will the dollar outlast the next decade as the global currency? In fact, this question has two different aspects both of which must be considered before a meaningful analysis can be performed. First, does the dollar possess the requirements of being the global currency? Second, is there a currency in the world that possesses the qualities necessary for replacing the dollar as the reserve currency?

To become the anchor of global trade and financial transactions, a currency must possess a number of properties. First it must have a stable value. Second, it must be issued and backed by an economic power that has credibility and fundamental strength enough to support the currency. Third, it must be the currency of choice for a strong and deep financial system that attracts capital from different parts of the world. Finally, the global financial infrastructure must be dependent on the global currency to function. Apart from these economic factors, a global currency must be issued by a nation that has significant political and military power as well, because many smaller nations choose to ally with such a power, and the natural outcome of such alliances is greater dominance for the currency of the bigger partner.

Does the dollar still posses these qualities? Although it has been fluctuating recently, its value is mostly stable. The fundamental strength of the U.S. economy is of course open to debate, and it is fair to say that the dollar is receiving little support from this angle right now. The financial system of the U.S., on the other hand, is still the deepest, most flexible, and liquid one in the world, and global trade is still dependent on U.S. dollar to function smoothly. This brief analysis seems to support the belief that the dollar still possesses the requirements of being the global currency.

And is there a currency in the world, at this stage, which appears as a better candidate for fulfilling the global currency role? There’s only one currency in the world which can ever pretend to take over the role of the dollar, and that is the Euro. Although the Euro fulfills most of the requirements of becoming the global currency, the powers that back it are not enthusiastic about seeing it assume the role of the reserve currency, and certainly do not possess the political or military power necessary for undertaking such a large project. Without the support of the EU, it is unlikely that the Euro will replace the dollar. And indeed, when nations discard the dollar as the commercial medium, they do not substitute the Euro in that role - they choose to trade in their own currencies. That model can work on a small scale, but clearly not on an international basis.

It is up to you to make your mind, and reach your own conclusions on this subject as you engage in online forex trading. In this article we have just touched this subject on the surface, and a lot that can be discussed has been left untouched. But we hope to have demonstrated that the demise of the dollar is far from being a foregone conclusion, in spite of the stridency and agitated state of mind of the mass media.