$US to $Linden Exchange Rates

North America has seen its fair share of debate and argument over the years on the subject of a harmonized currency. I have yet to find anyone other than an economist that is for that idea. So much of a nations identity is defined in the color, size and design of their currency that I can’t imagine any country voluntarily disposing of their notes and coins. Until the Euro came along. Next to the US, I expected Europeans love affairs with their scrip to be so zealous that they would never consider a change – but switch they did, with only the mildest public objections.

Now along comes China with a recent suggestion that will be sure to ignite the whole world currency debate all over again. Only this time there might be enough inertia from our current global economic plight to actually spur some constructive discussion amongst the leading regional economies. It is ironic (in a way) that China is the voice of change in this newly emerging world order…

Could a World Currency Replace the Dollar?

Monday April 20, 2009

       

^{(Credit: Getty Images)}

Last month, China suggested that the IMF develop a single global currency to replace the dollar as the world’s reserve currency. China is concerned the value of its holdings in dollars will decline as a result of U.S. deficit spending. However, any attempt to replace the dollar would be a massive, complicated undertaking. The dollar is used for 43% of all cross-border transactions, and 66% the world’s central bank foreign currency reserves are in dollars. (See Power of the U.S. Dollar)

What It Means to You

Since so many transactions are already done in dollars, the impact of a switch to a single world currency would not have as much immediate impact on U.S. citizens. Other countries’ economies would be more severely affected, as they attempted to set economic policy to compensate for U.S. policy. Flexible exchange rates between countries with different economies reduces risk, since the countries can set policy to benefit their needs. Eliminating flexible exchange rates would introduce more risk to the global financial system.

The most direct impact would be the elimination of the international forex trading system. This was over $3 trillion per day in 2007, the most recent estimate. This would affect all corporations that use this market to hedge foreign exchange risk. It would also affect day traders and other individuals who have switched to the forex markets from stocks, real estate and commodities.

… article courtesy of Kimberly’s US Economy Blog, By Kimberly Amadeo, About.com Guide to US Economy My Bio My Blog My Forum