The U.S. dollar has been under considerable scrutiny and pressure in the past several months. Treasury Secretary Geithner was laughed at during a June university tour in China when he proclaimed that the American government and dollar were sound and financially stable.More than one month ago NYU economist Nouriel Roubini discussed the very real prospect that the dollar would soon be replaced as the global reserve currency. At the April 2, 2009 meeting of the G20 in London, People's Bank of China governor Zhou Xiaochuan derided American spending habits and called for an end to the dollar's hegemony.
Governor Xiaochuan called for the International Monetary Fund to use its own basket currency – the Special Drawing Rights (SDR) – as a replacement. He stopped short of declaring that the Chinese yuan should replace the dollar as the dominant global currency – likely because it would instigate a dispute between China and the European Union.He did clearly state that America's instability, and the risks posed to Chinese-American investments, must be diversified. The suggestion to accomplish this was to expand the SDR to include more currencies – from China, Brazil, and India in particular.
It seems that governor Xiaochuan's call will be heeded by the IMF, at least in part. The IMF will vote August 7th on a measure which, if passed, would increase the volume of SDRs eightfold. In order for the SDR to replace the dollar it would need to dramatically increase its circulation. The first step would be to increase the volume of SDRs, the next step would be allowing organizations other than central banks and government organizations to hold, trade, and exchange them.Right now the dollar's primary competitor is the euro. The currency of Europe is valued 40 percent higher than that of the United States, and the British pound sterling is typically valued more than 60 percent higher. As the U.S budget inflated and its economy deteriorated, its currency began to fall apart.
It is unclear what the effects of a shift away from the dollar would be. It would likely mean less purchasing power for Americans and relatively more purchasing power for other currencies. However, if the dollar does become weaker it could potentially make foreign buyers more apt to purchase goods produced in the U.S.