There is a growing belief that the dollars days as the worldÂ’s reserve currency may be numbered, and that a trend to replace the dollar has already begun.
Although some have speculated this is inevitable, when the source is Alan Greenspan (the former US Federal Reserve Bank Chairman), they become particularly shocking. He has stated that it was Â“absolutely conceivable that the Euro will replace the Dollar as a reserve currency, or will be traded as an equally important reserve currency.Â”
This all implies that the dollarÂ’s present downward slide will continue. At the end of 2006, two thirds of all currency reserves were held in dollars but if Central banks continue to increase euro proportions at the expense of the dollar, demand for the dollar will fall and excess dollar supplies could start flooding the market.
In fact this trend is already under way as evidenced by the recent breakdown in the dollarÂ’s value. In recent months, the dollar has hit all time lows against the euro and multi-decade lows against many other currencies. The dollar has also reached new lows against oil and wheat, and a 28 year low against gold.
Although more countries still use the dollar as a reserve currency, the greenback doesnÂ’t actually have all that much of an advantage over the euro any longer. In terms of cross-border trade, the dollar accounts for 43 percent, while the euro is used in 39 percent of such transactions.
The trend to adopt the euro as a reserve currency has greatly benefited Europe. In addition to the prestige and power gained by the European Central Bank, EuropeÂ’s economy has also profited. With the euros emerging role, Europeans are beginning to experience the benefits that reserve currency status has given Americans Â– including lower interest rates and higher growth with diminished inflation concerns.
Loss of the dollarÂ’s reserve currency status would be a huge blow to the United States. It would drastically undermine the dollarÂ’s value and cause Americans to lose many unique economic blessings that they have become used to. Economic conditions in the U.S. may be about to radically change and Europeans could benefit accordingly.