Question

State the advantages and disadvantages of a foreign country adopting the U.S. dollar as its own currency.

Answer 1

The US dollar since the end of WWII, has overtaken the British pound as the globe’s foremost reserve currency, and it is the primary reason that most countries opt to use the US dollar. The strength and credibility of the dollar can help in economy's stabilization, which not only aids in recovery, however also promotes trust to attract international investment. Aid and commodities such as petroleum, oil, and gold are also handled in USD. Countries which use the dollar to conduct day-to-day transactions and to reduce inflation, as domestic currency can decrease the buying power in a short duration. Moreover eliminates the risk of a sudden, sharp devaluation of the nation's exchange rate thus assisting the country to decrease the risk premium attached to its global borrowing. Dollarized countries holds higher level of confidence among global investors, lower interest rate spreads on their global borrowing, higher growth and investment and reduced fiscal costs.

However the Dollarization cannot eliminate the risk of external crises because investors may flee due to issues in a country's budget position or the financial system soundness. When a nation gives up the option to print its own money, it ability to influence its economy directly is given up. It includes the administration rights on the monetary policy and any form of exchange rate regime. Also the central bank role is lost as the lender of last resort for the system of its banking. It can also ruin the country's sense of pride. Furthermore the right to issue a currency of a nation provides its government with seigniorage revenues, which reflects the profits of central bank and are transferred to the government. It would be lost to dollarizing nations and gained by the U.S. unless there is an agreement to share them