The US Dollar will lose its status as the world's reserve currency Term Paper

The US Dollar will lose its status as the world's reserve currency within the foreseeable future - Term Paper Example 8 Gilpin, R. & Gilpin, J. M. International economics: in the age of globalization. USA: Orient Blackswan, 2001. 8 Mankiw, N. G. Principles of Economics. USA: Cengage Learning, 2008. 8 Introduction US Dollar had historically been one of the sturdiest of all currencies around the world. Post World War II, when almost all nations around the world were suffering from dwindling resource endowments, they jointly decided to frame a monetary policy which would tie their respective national currencies with the US Dollar. Such a policy was set in order to strengthen the feeble currencies through tying the rates at which they could be exchanged. However with the passage of time, the stability feature assigned with the US dollars is reckoned to fade away especially after the inception of the Euro zone during late 1990s and after the economy was victimised by the subprime crisis. At present there are many claimants of the fact that the US dollar is about to lose its value as a stable reserve curr ency. Purpose of the present paper will be to enlist the arguments posed in favour of the aforementioned assertion. US Dollar is losing its status as the world’s reserve currency Euro had been getting closer to the US Dollars in terms of bank note circulation. Since its inception during the latter years of 1990s, the currency is found to be soaring high in terms of popularity especially among the Asian nations where almost two-thirds of total Euro bank notes in circulation are concentrated. The table alongside displays ample information to establish Euro is fast surpassing Dollars in terms of its circulation. To emphasise, stock of Euro has increased by 7 percent between 1999 and 2003 while that of Dollars has receded by 6.7 percent between 2001 and 2006. The diagram alongside shows the extents to which different foreign reserves are found to be growing over the years. Growth in Euro is witnessed as reaching a peak during 2002 and exceeding the corresponding rate for US Dolla rs (Becker 3). â€Å"With the creation of the euro in 1999, and the growth of the US external debt and current account deficits since then, the economic appeal of the dollar as an international currency has become less distinctive† (Helleiner, 367). In fact, during the post Euro era, the position of US dollar has been fast depreciating owing to the fall in its store of value and liquidity. A downfall in the degree of liquidity of the currency accounts for the huge sums of US Dollar reserves that East Asian nations reserve had been maintaining in their reserves; this specifically is the reason behind a fall in the US Dollar circulation (Helleiner, 368). Prior to the introduction of Euro, US Dollars assumed the topmost position in the international arena. This was primarily due to the existence of distinct currencies throughout Europe that transaction via US Dollars was associated with a certain degree of economies of scale. However, after Euro was introduced to the world, a ch unk of the world’s important foreign market came to be expressed in terms of Euro and thus, US Dollars lost the economies of scale they used to enjoy previously. An important reason why US Dollars has been diminishing in value in comparison to Euro is that, the latter now represents a chunk of the European continent. This chunk now symbolizes a large unit of the entire global market which is found to be beating that of USA even. Hence, in most of the cases, commodities and services which are available in both markets are denominated in terms