Is the US dollar waning in strength?

Page last updated at Wednesday, March 23, 2011 17:17 PM

Even though America replaced Britain as the largest economic power since 1870, it was not until 1925 that the US dollar could claim international importance as a result of the steps the US took to stabilize their financial system by creating the Federal Reserve earlier in 1913.

Ever since that time the US dollar has come to be accepted not only as a medium of exchange in international transactions but has also established itself as a major reserve currency. The dollar holdings of the Chinese government for instance amount to more than US$1,000 per Chinese resident. In fact slowly the US dollar has occupied its role as world currency.

Now nearly 75% of the $100 notes circulate outside the US. Majority of Central banks have their reserves in US dollars. Over 80% of world transactions are in US dollars forging far ahead of the Euro, which is considered to be the number two currency involving international transactions.

Thanks to developing strategic planning and establishing strategic military relationships, enacting effective laws and agencies to lend stability to the dollar, the USA could even make New York the world’s financial hub replacing London. This has been the story of the US dollar over the last sixty years without any competition.

Japan was not keen on promoting the Japanese yen to become an international currency for fear of over valuation affecting its exports. It is important, however, to note that the trend has been for international investors to migrate to dollar holdings in times of economic uncertainties. For a long time now, the dollar was considered as safe haven. We witnessed the soundness of the dollar in 2008 when after the collapse of Lehman Brothers and during the recent financial crisis the dollar remained steady and even strengthened in global markets.

This unassailable position of the US dollar gave numerous benefits to America. The scramble for the dollar in the world enabled the United States to issue treasury bills at low cost and have access to cheap funds. And American commercial transactions can be in home currency instead of being in a different currency. This situation was described by Valery Giscard Easting, the French Finance Minister in 1960 as its “Exorbitant Privilegeâ€