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Tuesday, June 7, 2011

Shall dollar replacement jeopardise USA?

Due to burgeoning USA debt followed by bouts of Quantitative easing by USA government, has resulted in loss of faith across the psyche of investors.Central banks over the world are abandoning dollars as reserve currency preferring gold to US dollar. A currency loses value when government is unable to pay the national debt.
In March 2011, IMF too has called for new world currency other than dollar. Since Second World War US dollar has been enjoying this world currency status which made USA spent more than its revenues.US treasury department sold US treasury products to the world and countries like China and Japan voraciously grabbed treasury products to fund their oil bills (which required US dollar under petro dollar system) and to compensate for their trade deficits with US.
Another reason for parking funds in US treasury products was to keep their currency competitive against dollar to boost domestic export.
The modus-operendi of the aforesaid in case of Japan is discussed here.
Insatiable spending appetite of US citizens is one of the prime reasons behind the piling up of sovereign US debt.Too much export over import caused the trade deficit, which is consistently been over 4 % for past several years.
Any nation having higher trade deficit is likely to  face effects like fleeing investors, increasing unemployment, rising interest rates which ultimately drag the nation towards the recession.
But US managed to escape this grim situation, thanks to its hot US treasury products which got sold like hot cakes to countries like Japan, China and Russia.But there shall no longer be such rosy days if dollar gets replaced by some other currency as the world’s reserve currency, this shall further devalue the dollar.
What shall be interesting to see is how nations like China and Japan shall react to dollar devaluation as they are the largest holders of US treasury products.

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