The role of US dollar as an international currency will be deluted in the world

economy by 2020. Do u agree? Explain.

As global trade has grown, so has the need for international institutions to maintain
stable, or at least predictable, exchange rates. But the nature of that challenge and the
strategies required to meet it evolved considerably since the end of the World War II -- and
they were continuing to change even as the 20th century drew to a close.
Before World War I, the world economy operated on a gold standard, meaning that
each nation's currency was convertible into gold at a specified rate. This system resulted in
fixed exchange rates. That is, each nation's currency could be exchanged for each other
nation's currency at specified, unchanging rates. Fixed exchange rates encouraged world trade
by eliminating uncertainties associated with fluctuating rates, but the system had at least two
disadvantages. First, under the gold standard, countries could not control their own money
supplies; rather, each country's money supply was determined by the flow of gold used to
settle its accounts with other countries. Second, monetary policy in all countries was strongly
influenced by the pace of gold production. In the 1870s and 1880s, when gold production was
low, the money supply throughout the world expanded too slowly to keep pace with
economic growth; the result was deflation, or falling prices. Later, gold discoveries in Alaska
and South Africa in the 1890s caused money supplies to increase rapidly; this set off
inflation, or rising prices.
Since 1944, when nations around the world ratified the Bretton Woods Agreement,
the US dollar has been the most dominant currency in the world. The Bretton Woods
agreement was a bid to prevent the protectionist policies from the 1930s repeating itself and
leading to world economic depression. The basic principle of the Bretton Woods is simple.
The US dollar is the defacto world currency and other nations just peg their currency to the
US dollar. The US dollar in turn is backed by the gold reserves with the promise of
redeeming dollars for gold anytime. Being back by the precious commodity, the US dollar
provided other nations with a hard currency which they could keep as reserves and a means to
settle international trade transactions. Everyone in the world accepted the US dollar as
payment for transactions.
However, this system eventually came to an end in the year 1970 because the USs
widening trade deficit led to fears on the weakness of the dollar. The fixed rate system was

then replaced with floating rate system where the value of each currency is allowed to be
value by market forces. In todays world, the role of currency reserves is not longer confined
to settling international trade differences but also used as investment funds and protection
against currency market speculators.
Although most countries no longer pegged their currency, the role of the US dollar in
world economy is still very prominent. It is still the defacto reserve currency held by almost
two thirds of international central banks. This status as the reserve currency means that most
commodities are priced and traded in US dollars. In order to make the transaction, US dollars
must be used. Therefore, it is the key that the US dollar maintains its role and strength in the
world currency market.
In recent years however, the size of the US trade and budget deficit along with its
gigantic national debt has prompted many to question if the worlds strongest economy can
maintain the dollar as the reserve currency. This is couple with the fact that the Euro,
currency of the European Community has become much stronger since its introduction. With
the Euro as a viable alternative to the US dollar, the role of the US dollar as the reserve
currency is under threat with many international companies choosing to trade in the Euro
rather than the dollar. As the private sector moves against the dollar, it wont be long before
the US dollar loses its status among the international central banks as well.
The U.S. dollar is the most common currency for international reserves, for good
reason. First, because of the size of our economy, there are plenty of dollar-denominated
securities available. The market for United States Treasury securities is liquid and deep.
Liquid means that the securities can be sold quickly. Deep means that a substantial
amount can be bought or sold without affecting the price too much. These are desirable
features of a foreign reserve currency. If Ruritania were to hold an obscure currency, such as
the the Paanga of the Kingdom of Tonga, it might not find willing buyers on short notice.
Even if it did, there is no way that Ruritania could quickly sell billions of Paanga without
pushing the foreign exchange rate disastrously low. Thus Ruritania needs to own currencies
of large countries, which are traded in large amounts on a daily basis.

The dollar fits the need pretty well. The Euro plays second fiddle, with Japanese Yen
and British pounds sterling just barely in the band. A number of other currencies are used in
small amounts.
An additional requirement for a good reserve currency is that assets denominated in
that currency are unlikely to lose value to a great extent. Heres the tricky point. If defaults or
credit downgrades were widely expected to reduce the price of U.S. Treasury securities, then
other countries would prefer to hold their reserves in some other asset.
As the second decade of the twenty-first century begins, we find ourselves at one of
those relatively rare moments in history when major power shifts become visible to all. If the
first decade of the century witnessed profound changes, the world of 2009 nonetheless looked
at least somewhat like the world of 1999 in certain fundamental respects: the United States
remained the worlds paramount military power, the dollar remained the worlds dominant
currency, and NATO remained its foremost military alliance, to name just three.
By the end of the second decade of this century, however, our world is likely to have
a genuinely different look to it. Momentous shifts in global power relations and a changing of
the imperial guard, just now becoming apparent, will be far more pronounced by 2020 as new
actors, new trends, new concerns, and new institutions dominate the global space.
Nonetheless, all of this is the norm of history, no matter how dramatic it may seem to
us. Less normal, and so the wild card of the second decade (and beyond), is intervention by
the planet itself. Blowback, which we think of as a political phenomenon, will by 2020 have
gained a natural component. Nature is poised to strike back in unpredictable ways whose
effects could be unnerving and possibly devastating. What, then, will be the dominant
characteristics of the second decade of the twenty-first century? Prediction of this sort is, of
course, inherently risky, but extrapolating from current trends, four key aspects of seconddecade life can be discerned: the rise of China; the (relative) decline of the United States; the
expanding role of the global South; and finally, possibly most dramatically, the increasing
impact of a roiling environment and growing resource scarcity.
That China has become a leading world power is no longer a matter of dispute. That
countrys new-found strength was on full display at the climate summit in Copenhagen in
December where it became clear that no meaningful progress was possible on the issue of

global warming without Beijings assent. Its growing prominence was also evident in the way
it responded to the Great Recession, as it poured multi-billions of dollars into domestic
recovery projects, thereby averting a significant slowdown in its economy. It spent many tens
of billions more on raw materials and fresh investments in Africa, Latin America, and
Southeast Asia, helping to ignite recovery in those regions, too.
If China is an economic giant today, it will be a powerhouse in 2020. According to
the U.S. Department of Energy (DoE), that countrys gross domestic product (GDP) will
jump from an estimated $3.3 trillion in 2010 to $7.1 trillion in 2020 (in constant 2005
dollars), at which time its economy will exceed all others save that of the United States. In
fact, its GDP then should exceed those of all the nations in Africa, Latin America, and the
Middle East combined. As the decade proceeds, China is expected to move steadily up the
ladder of technological enhancement, producing ever more sophisticated products,
including advanced green energy and transportation systems that will prove essential to future
post-carbon economies. These gains, in turn, will give it increasing clout in international
affairs.
China will undoubtedly also use its growing wealth and technological prowess to
enhance its military power. According to the Stockholm International Peace Research
Institute (SIPRI), China is already the worlds second largest military spender, although the
$85 billion it invested in its armed forces in 2008 was a pale shadow of the $607 billion
allocated by the United States. In addition, its forces remain technologically unsophisticated
and its weapons are no match for the most modern U.S., Japanese, and European equipment.
However, this gap will narrow significantly in the centurys second decade as China devotes
more resources to military modernization.
In conclusion, basically we agree with this statement in terms of all argued above in
our study. We can see the market now suggestive to the China developing market in their
country. These, then, are the trends most likely to dominate the second decade of this century.
Perhaps others will eventually prove more significant, or some set of catastrophic events will
further alter the global landscape, but for now expect the dragon ascendant, the eagle
descending, the South rising, and the planet possibly trumping all of these.