Ammar discusses current theories and financial market insights as an inspirational character from DUBAI, United Arab Emirates.
Can you share your thoughts on the theory that the dollar will no longer function as the world’s reserve currency? Will it ultimately fail?
Well, this is one of the most complicated questions and one of the most circulating theories. It’s similar to the end of fiat currency theory. First, a theory is vague, and we need to know the basics of the theory to evaluate it.
The currency market is the largest financial market in the world. The US dollar makes up 88% of the currency trade, which is by far the most used currency in the world, followed by EUR 32.30%, JPY 16.80%, and GBP 12.80%. So, if you are going to hold money in your savings account, you are generally going to hold one of those four currencies because they are generally accepted as the most stable ones. An important feature when we discuss currencies is that strategically, they are a zero-sum game; there’s always a winner and loser because you are always transferring funds from one currency to another. For instance, if your savings account needs to exist in some form of currency and if you want to convert it from US dollars, you will convert to Euros or from Euros to Pound Sterling or some other currency. Let me ask you a question: Which one of those currencies are you going to transfer your US dollars into? There aren’t really that many great options, which is the answer to why many people around the world are holding US dollars. With that background, how could a currency crisis happen with the US dollar? Now, there have been crises in the past which we know a little bit about and how they work. Currency is about confidence, so there was a lack of confidence in the US’s ability to back their currency, we would see a massive exodus from the US dollar into the other top-three currencies. As such, there will be massive inflation in the United States, so people will want to use other currencies to make transactions because they will be more stable and provide better buying power. That brings us to our current situation with the Recession. The unique thing in this crisis is that it is global. Every country around the world is dealing with the same problem, so there is no incentive to move your currency from the US dollar to the UK’s pound or anywhere else, as they are just as unattractive as the US dollar. So, from a currency standpoint they are even less attractive in a crisis that affects the entire globe. Individuals and companies would actually want more US dollars. All of this US/ Banking Fears is actually paid for by demand towards US dollars around the world. People want to buy US dollars. People want to buy US debt because, in comparison to other countries, it is considered the safest and the most stable in its supply and demand
The proof of all this is that if there was a drop in demand for the US dollar, we would see it in the currency markets.
As concerns about a banking catastrophe subside, the dollar is rising right now.
Following an overnight increase of 0.19%, the dollar index, which compares the greenback to six significant rivals, increased 0.097% to 102.73. Due to market turmoil brought on by issues in the banking sector, the index was on track to experience a 2% drop in March.
However, we don’t see that; we see more demand for the US dollar. Even if there was a slight drop in demand, we would see it and the US would just change their policies to strengthen the US dollar. The whole point of the Federal Reserve is to create a group of really smart people who just sit there and watch financial markets and they increase or decrease the supply of US dollars to maintain the currency’s stability. That’s why the dollar is the reserve currency of the world. Hence, I am not saying that the dollar could never suffer a currency crisis. Of course, currencies could collapse but the current recession.
isn’t of one of the scenarios that lead to currency collapse because everyone is suffering the same fate. The real reason the US dollar is the most attractive currency in the world is that Americans work hard for really long hours and with very short vacations. They make a lot of money and they spend that money in US dollars. There is confidence that the American dollar will be able to work its way through the current global economic crisis.
