Is the Dollar Losing Its Global Luster?

AMA10-20-13The dust is settling after the end of the government shutdown, but the dollar continues its downward slide. As the world’s leading reserve currency struggles amid concerns about its long term stability, some countries are calling for an alternative reserve money and the “de-Americanization” of global finance.

Backed by the US Treasury, the dollar has set the standard in modern times as the key reserve currency, making the US the leading global financial power. Around the world, US Treasury bonds and other securities backed by the Treasury lead the way in supporting value. And that makes those instruments the “go-to” method of exchange for countries and private investors around the globe.

But the recent upheaval in Washington that led to the 16-day shutdown and fights over keeping or raising the debt limit seems to have shaken the world’s confidence in the dollar as a stable reserve currency. Other currencies are surging, including China’s. And that’s why China, along with other Asian countries, are raising the point that it may be time to retire the dollar as the backbone of world financial reserves.

Back in the US, too, the aftermath of the shutdown has economists and financial experts worried about a looming recession, as the dollar’s buying power weakens, along with consumer confidence. That’s one reason why the Federal Reserve opted to keep its stimulus program going into the foreseeable future, with speculation that it will last at least through 2014.

Some economists argue that the stimulus plan may actually be bad for the dollar, since it’s keeping interest rates artificially low and making lending possible on a scale that’s not actually backed by the markets. But with concerns about the damage the shutdown and the debt crisis might do to an economy still struggling to recover, the stimulus is expected to keep the housing recovery afloat – and with it, other areas of the economy such as employment.

For now, talk of finding an alternative reserve currency in case the dollar really tanks is just that – talk. But it points up the worries caused by the dollar’s apparent vulnerability in world markets. More concerns loom as the Federal Reserve changes hands in 2014. But in the short term, a debt crisis has been averted, allowing the country to keep borrowing.

So far, the money uncertainty hasn’t had a measurable impact on housing prices or availability in the housing market as a whole, though consumer purchasing in general remains jittery. And though they’re beginning to rise, interest rates remain relatively low, thanks to the Fed’s continued backing of the stimulus plan. While the dollar finds its fate in the world market, it’s a good time for investors to take Jason Hartman’s advice to stay informed – and diversify for the best return in these uncertain financial times.  (Top image:Flickr/edwardm)

The American Monetary Association is the source for financial news you can use. Read more from our archives:

The Dollar Falls, the Stimulus Stays the Course

The Debt Ceiilng Debate and the Next Recession

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