Question

Why are we seeing a strong demand for dollars? What are the consequences for banks?

Answer 1

Before looking why Dollar has strong demand, we need to look why US Dollar became the global currency.

U.S .Dollar - A global currency

• Brettonwoods system was established in 1944. It was a new monetary system developed by the delegates of 44 countries at the fianacial conference held in Brettonwood, New Hamsphire. Under brettonwood system gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value.
• In 1973 brettonwoods system completely suspended.
• From 1955 -1975, America engaged a war with viatnam. So that time America invested more amount of cash for this war. Each and every countries noticed this affair.
• So naturally each and every coutries doubted that, how the america printing these much of currency or by which standard America printing huge amount of currency than gold reserve.
• Actually in Bretton woods system we all know that currency can be print only against gold reserve.
• Because of these, most of the countries suggested to audit against note printing. But, that time america did't agreed for that type of audit.
• These leads to the lose of confidence against America by other countries. Then France in 1971 demanded Gold against Dollar.
• But Nikson ( U.S president in that time) rejected this demand and he temporarly suspended Bretton woods system.
• So in 1973 Bretton wood Agreement ended. This resulted cancellation of all decisions taken in Bretton wood system. That is from 1973 onwards U.S Dollar won't be backed by gold and gold standard system completley abolished.
• Then after countries currency was not peged against any other commodity. This leads to emergence of Fiat currency.

Fiat currency.

• It is a currency that a government has declared to be legal tender, but it is not backed by a physical commodity.

Even after the end of Bretton woods system U.S Dollar beimg the global currency. We acn see that till U.S. Dollar is the global currency. You know why?

It is because of Petro Dollar system.

Petro Dollar System

• It was America's selfish interest to maintain USD as global currency. For this America decided to make an agreemen with saudi arabia. Beacuse, most of the countries need curde oil, eacha d every countries purchasing crude oil.(Mostly they are purchasing from middle east countires)
• Crude oil is an essential commodity for all countires.
• Because of this, America decided to make an agreement that, crude oil must purchased in USD only.
• For this Richard  NIkson in 1974 went to Saudi Arabia to meet Saudi King Faizal. Nikson demanded this proposal and in return America will protect their crude oil resources and America give protection to saudi from war.
• So atlast saudi agreed this demand. That is Saudi agreed to trade crude oil in USD for which U.S agreed to protect saudi and its oil resources. This agreement is called Petro Dollar system.
• so this is the reason for U.S dollar being the global currency and strong demand.
• After the successfull agreement with Saudi, america again made agreement with organisation of petroleum exporting countries(OPEC)

Consequences for banks

• It has been downward trend for all  international bank stocks this year beacause of strong demand for Dollar.
• The downside to the strong dollar is that it makes our exports more expensive, and thus our domestic manufacturing less competitive
• Reserve banks of other countries except U.S want to keep large amount of currency in Dolar for purchasing crude oil.
• Strong demand for Dollar will leads to less demad of domestic currency.
• Reserve banks will face critical situation in case of money supply. They will take so any meaures to stable the economy.