The dollar has been the World's Reserve Currency since the 1970s when the Gold Standard was abandoned by President Nixon. Since then, the US dollar is widely accepted across the world making it the world's leading currency. Today 43% of all cross border transactions use the US dollar. Furthermore, central bank reserves indicate that the value of the dollar is strong with 61% of these reserves being in dollars.
However, speculation has been rife over the past few years that this currency may die even as its percentage of the world's currency supply diminishes. This is backed by a report by the International monetary fund that shows how the dollar has drifted marginally to a 15 year low. What this means is that countries that have been willing to use the dollar are ready to adopt other currencies to do business.
There are a number of circumstances that set the ground for the collapse of the dollar among them an underlying weakness, the presence of another viable currency alternative for all and a trigger towards the collapse. Presently, the first condition exists as the US dollar has recorded a 54.7% decline against the Euro in as span of 10 years. During this time the US debt almost tripled. Analysts claim that this is a sign that the U.S. will allow the value of the dollar to decline so as to pay its debt with cheaper currency.
China is consolidating its share of gold with the hope that it will become the international currency in the near future. Gold is considered a better replacement to the US dollar because of its worth. As such, China is buying into the world's gold reserves in a bid to create a new currency.
Economists argue that should China succeed in increasing its market share in the world currency market, then there are high chances that the US dollar will be a loser. Even then, pessimists hold the belief that this can only work for the Chinese and not the Americans.
To understand this better, it is worth noting that the reason why the death is the dollar is inevitable is that an asset backed currency needs to replace it. According to financial experts, the biggest shock will be in the currency reset that will be followed by the Gold Trade Standard. Hence the return of the gold standard is near although it will be through trade vehicles as opposed to SWIFT bank platforms and Forex currency. Consequently, Gold Trade Notes will be used in the place of a letter of credit.
China's recent slowing of economic growth as well as potential credit problems has worked for the dollar that has gained strength over the Yuan.
China's recent slowing of economic growth as well as potential credit problems has worked for the dollar that has gained strength over the Yuan. In summary, the future of the US dollar is worth looking out for in light of the possible return of the gold standards. Ultimately, there is no need to panic and sell assets as economists will be available to offer advice on the best way forward for investors as well as speculators.
Showing posts with label Modern Global Economy 2015. Show all posts
Showing posts with label Modern Global Economy 2015. Show all posts
Friday, 23 October 2015
Friday, 17 July 2015
Modern Global Economy 2015
Globalism is here to stay and in an overtly simplistic view I shall attempt to illustrate how markets today have become so inter-linked.
Firstly, at the heart of the modern global economy are the equities markets. The modern corporation is the engine of all economic activity. it combine resources, employs capital and labor and utilizes entrepreneurship to make markets happen and deliver goods and services to consumers. The Dow Jones Industrial Average is the chief barometer of global corporate activity. People in Tokyo love to eat a Mcdo's or KFC just as much as people in Mumbai wish to pay for goods with their Citibank credit card, or drive their new Ford in London or even buy a nice new G.E refrigerator in Amsterdam. When people in Milano stop ordering their Starbucks and people in Paris stop buying Apple items, then global corporate cash-flows become affected and equities values plunge on drop in earnings. Similarly, companies on the European exchanges best summed up through Euro Stoxx 50 for the top European companies have cash-flows in USA, China and everywhere else which can be jeopardized by consumer sentiment.
Secondly, global interest rates provide credit lines to companies to grow. Key interest rates are the US Dollar rates determined by the Federal Reserve. When Interest rates in the USA go up as they have been preparing for over the last 3 months, then equities investors get nervous because companies will have to face higher borrowing costs. Bond investors also will not be happy to see US interest rates go up because of the inverse relationship between interest rates and prices; when interest rates goes up prices of bonds go down.
Thirdly, the value of the dollar is very important to the global economy because most commodities and raw resources like crude oil are quoted in terms of US Dollars as is gold bullion. when the US Dollar is cheap in value relative to the Aussie Dollar or Swiss Franc or Euro currency, then more of the US Dollar currency unit can be purchased and demand for commodities increases. When the value of the US dollar increases it then becomes more expensive to acquire a barrel of crude oil and an ounce of gold bullion. Also when the US Dollar is expensive it becomes more expensive to purchase US stocks and bonds.
Thus in this simple explique we can truly understand the nature of the global economy where events in one region can affect the other. This is because today large corporations around the world have been driven to internationalize in the search for increased sales and higher market value.
Firstly, at the heart of the modern global economy are the equities markets. The modern corporation is the engine of all economic activity. it combine resources, employs capital and labor and utilizes entrepreneurship to make markets happen and deliver goods and services to consumers. The Dow Jones Industrial Average is the chief barometer of global corporate activity. People in Tokyo love to eat a Mcdo's or KFC just as much as people in Mumbai wish to pay for goods with their Citibank credit card, or drive their new Ford in London or even buy a nice new G.E refrigerator in Amsterdam. When people in Milano stop ordering their Starbucks and people in Paris stop buying Apple items, then global corporate cash-flows become affected and equities values plunge on drop in earnings. Similarly, companies on the European exchanges best summed up through Euro Stoxx 50 for the top European companies have cash-flows in USA, China and everywhere else which can be jeopardized by consumer sentiment.
Secondly, global interest rates provide credit lines to companies to grow. Key interest rates are the US Dollar rates determined by the Federal Reserve. When Interest rates in the USA go up as they have been preparing for over the last 3 months, then equities investors get nervous because companies will have to face higher borrowing costs. Bond investors also will not be happy to see US interest rates go up because of the inverse relationship between interest rates and prices; when interest rates goes up prices of bonds go down.
Thirdly, the value of the dollar is very important to the global economy because most commodities and raw resources like crude oil are quoted in terms of US Dollars as is gold bullion. when the US Dollar is cheap in value relative to the Aussie Dollar or Swiss Franc or Euro currency, then more of the US Dollar currency unit can be purchased and demand for commodities increases. When the value of the US dollar increases it then becomes more expensive to acquire a barrel of crude oil and an ounce of gold bullion. Also when the US Dollar is expensive it becomes more expensive to purchase US stocks and bonds.
Thus in this simple explique we can truly understand the nature of the global economy where events in one region can affect the other. This is because today large corporations around the world have been driven to internationalize in the search for increased sales and higher market value.
Subscribe to:
Posts (Atom)