Question

Our learning this week is on international capital flows and the dollar as a reserve currency.

There have been several predictions about the future of the dollar as a reserve currency. This debate is far from over. So, here are two perspectives. Use your knowledge of international trade, capital movements, and economic power etc, to form the basis of your arguments.

Answer 1

The U.S. dollar is no immediate danger of losing its reserve currency status. Some financial commentators continually predict the loss of the U.S. dollar as the main international reserve currency. Critics cite the attempt of China to push its yuan to reserve currency status. They also say that U.S. quantitative easing and large budget deficits will ultimately have the effect of cheapening the dollar so that it is no longer the reserve currency.

Despite these predictions of the U.S. dollar's demise, the doom and gloom never seems to pass. Instead, the U.S. dollar has strengthened significantly during 2014 to 2015 in the wake of economic headwinds in Greece, China and other places around the globe. At this point in time, it appears the calls for the death of the dollar are unfounded.

Those predicting the demise of the U.S. dollar point to China as a major concern. China is pushing hard to have the renminbi , or yuan, lifted to a reserve currency status. By gaining reserve status, central banks might begin to increase their yuan holdings. The Chinese government has been pleading its case to the IMF. It must prove that the yuan is available for use in international markets. China has discussed opening up its markets to international investment.

However, China decided unexpectedly to devalue the yuan in August 2015. In a move that surprised international markets, China devalued the yuan, causing the largest one-day loss in 20 years. This seems to conflict with its attempts to become a reserve currency.

The Chinese government states the devaluation will allow the currency to be more market-driven. The yuan had been gaining strength during the prior decade. Some believe that the devaluation was intended to make Chinese exports cheaper. It is unclear what effect the devaluation will have on the bid to become a reserve currency.

The U.S. dollar's continued strength is the main indicator that it is not losing reserve currency status any time soon. The U.S. dollar increased in value around 10% from January to August of 2015. This increase in value is due to continued strength in the U.S. economy. Issues with Europe and other countries around the globe have made the U.S. an economic safe haven. This has supported the value of the U.S. dollar.

The U.S. dollar also continues to be the currency of choice for foreign exchange transactions. Around 90% of foreign exchange transactions involved the U.S. dollar in 2013. More than 80% of international trade finance was conducted in U.S. dollars as well. These statistics reflect the continued dominance of the dollar. Any concerns about the loss of currency reserve status for the U.S. dollar can be put on hold for the foreseeable future.