Last month, China suggested that the IMF develop aÂ single global currencyÂ 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. (SeeÂ 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. FlexibleÂ exchange ratesÂ 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.