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8th May 2023 (7 Topics)

Will the greenback still be green?

Context:

As China, India, and Russia dabble in trade using partner currencies for payment instead of the U.S. dollar, various media are rife with speculation about the demise of the dollar as world reserve currency.

The rise of the dollar

  • Strong and stable economy of USA: The rise of the dollar as the world currency closely aligns with the rise of the U.S. as one of the world’s strongest economies with a deep financial system and a stable government. 
  • Uninterrupted dominance: Dollar has seen many competitors (Pound, Euro). However, the dollar seems to continue its dominance uninterrupted.
  • Chinese currency: China runs a closed capital account. Most of the Renminbi reserves that are held outside China are by Russia. 

Dollar-denominated assets

  • Huge demand: Along with general acceptability as a medium of exchange for international trade, the U.S. dollar is also in demand because of demand for dollar-denominated assets worldwide.
  • Hedge against currencies: The debt issued by the U.S. government is bought by the world as a hedge against currency fluctuations affecting valuation of reserves.
  • Currency pegged to Dollar: Currencies are pegged to the U.S. dollar and a few countries use the dollar as their own currency.
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