World getting twitchy about the dollar
March 21st, 2009A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.
The dollar has reigned supreme as the international reserve currency since the end of World War II, first on the gold standard under Bretton Woods and then on a de facto oil standard after Nixon severed the dollar’s link to gold. The value of the dollar has wavered in recent years as the United States ran up huge twin budget and external deficits. The number of the world’s economic and political leaders foreseeing and calling for the end of dollar hegemony has been increasing.
Russia will also be proposing the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting.
The uncertainty about the future of the dollar’s role as the world’s reserve currency threatens the value of the dollar. If central banks undertake to rebalance their foreign exchange reserves by selling their dollar holdings, the U.S. may find it increasingly difficult or perhaps even impossible to finance the trillion-dollar budget and trade deficits that are being forecast for years into the future.
