A Rising Dollar Is Hurting Other Currencies. Central Banks Are Stepping In. (Published 2022) (2024)

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A Rising Dollar Is Hurting Other Currencies. Central Banks Are Stepping In. (Published 2022)? ›

Central Banks Are Stepping In. The Federal Reserve's interest rate hikes are unsettling global markets and prompting other central banks to prop up their domestic currencies.

Some say it will be the euro; others, perhaps the Japanese yen or China's renminbi. And some call for a new world reserve currency, possibly based on the IMF's Special Drawing Right or SDR, a reserve asset. None of these candidates, however, is without flaws.

The dollar strengthens when interest rates rise, and international investors view it as a safe haven for maintaining and increasing value during turbulent economic times. In general, the strength and value of a currency depends on the demand for that currency.

The US dollar has been the world's reserve currency for decades, but its dominance is fading. Sanctions against Russia have spurred other countries into considering backup currencies for trade. US monetary policies, the strong USD, and structural shift in the global oil trade also contribute.

For example, a stronger dollar means U.S. goods may be more expensive to purchase overseas, and U.S. company profits from foreign sales will be worth less after converting local currencies to the dollar. Investors may want to consider the role of currency trends when positioning portfolios.

For now, China's development of an alternative financial infrastructure does not pose a credible threat to U.S. leadership in financial markets or the dollar's status as the world's reserve currency. The U.S. dollar remains the dominant currency in nearly all aspects of international trade and finance.

Countries like India, China, Brazil, Malaysia and Bolivia, among others, are seeking to set up trade channels using currencies other than the almighty dollar. With so much of the world economy reshaping itself in the post-pandemic landscape, is the reserve status of the U.S. dollar going to be the next domino to fall?

Despite occasional challenges and concerns, the likelihood of the U.S. dollar collapsing is considered to be extremely low, given its strong global position and the underlying strength of the U.S. economy.

In the event of a dollar collapse, diversification becomes a critical strategy for safeguarding assets. Relying solely on fiat money, such as the United States dollar, Euro, or the Japanese yen, exposes investors to the risk of inflation and depreciation, eroding the purchasing power of their savings.

What happens if US dollar is no longer the world standard? ›

A weaker dollar could impact various aspects of the global economy: Trade and Competitiveness: A weaker dollar could boost the competitiveness of US exports, making them more attractive to foreign buyers. However, it could also lead to higher import costs, potentially fueling inflation in the domestic market.

Japan continues to be a popular choice, but Vietnam and South Korea stand as solid alternatives among numerous countries in Asia with favourable exchange rates for the US dollar. Closely following in value are South American countries: Argentina and Chile are among those offering the biggest luxury bang.

Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.

A weaker dollar, however, can be good for exporters, making their products relatively less expensive for buyers abroad. Investors can also try to profit from a falling dollar by owning foreign-currency ETFs or investing in U.S. exporting companies.

Amid the de-dollarization debate, countries are lining up backup reserve currencies for trade and payments. Sanctions against Russia sound a cautionary tale over the power Washington — and the USD — wields. The Chinese yuan, gold, Bitcoin, the euro, and a common BRICS currency aim to chip away at USD supremacy.

BRICS would have a strong case for replacing the dollar with a reserve currency of their own, except that the performance of their currencies has generally been even worse than the dollar as shown in Figure 1.

A currency used by all nations would have an impossible task of attempting to cater to all countries to allow them their own freedoms. Unfortunately, in reality, a world currency would mean that many weaker nations would surrender a lot of their sovereignty, which could cause conflict.