CENTRAL BANKS WORLDWIDE began discarding the dollar in favor of the euro in an attempt to minimize their losses following the decline in the value of the US currency.
An opinion poll conducted by the Management Trend research firm showed that more than two thirds of the world's central banks have reduced their exposure to the US dollar.
According to the poll conducted in 2005, 65% of central banks, managing more than two trillion US dollars, have begun to realize that the US currency cannot be relied on for these banks' reserves.
More recently, the euro rallied against the US dollar to the 1.32 mark, the US dollar has shed more than 14% of it value against the euro over the last year, and 50% of its value over the past five years. This decline is attributed to fears over the US' trade deficit with the rest of the world's countries.
This deficit exceeded $586 billion by the third quarter of this year, and is expected to exceed $716 billion by the end of the year. The greater part of this deficit is a result of the trade exchange with China.
The drop in the exchange rate of the US dollar was also linked to a poll conducted by German economic departments, which revealed an increase in the levels of confidence in the performance of the European economy to a 15-year-high.
The increased strength of the euro comes as US citizens and the US government enjoy the most favorable terms in the international trade exchange, as they borrow trillions of dollars worth of commodities, housing, and military funding from abroad at a cost of borrowing that does not exceed 5%, while at the same time, returns on US foreign investments exceed 20%, leading to a situation in which the US foreign debt reached $13.6 trillion, or $119,000 owed by each American household.
Geostrategic pressures, North Korea's nuclear test, the war in Iraq, the tension over Iran's nuclear file, threats to the continuity of the flow of supplies from the Middle East and natural gas from Russia, and, finally, Iran's announcement of selling natural derivatives in euros; all this constitutes pressures on US policies and US economy, which reduces confidence in the US' ability to face all these challenges.
Over the coming decades, such challenges could lead to a receding US military, political and economic influence, and may even push the US into isolation and regression toward within.
Can the US dollar maintain its status as a safe haven, and at the same time the leading currency for trade exchange?
From a historical perspective, 60-90% of trade exchange in the 19th century was conducted in the Pound Sterling, and Great Britain enjoyed a superpower status before the turning of the US dollar into the leading currency of the world's economy.
Data that has emerged over the few past weeks, however, points to the possibility of new European members, in addition to Britain, joining the unified monetary bloc by 2020, and making the euro the world's leading currency.
With its economic power, China is also expected to become the world's top exporter by 2010, and the world's economic superpower by 2020.
Accordingly, all the indications suggest that the US dollar might run out of luck over the next 20 years, and also concerns over the impact of a declining population growth level on European economic growth rates are not as serious as concerns over the US' growth rates, as the Europeans are also expected to correct this imbalance by opening the door to skills and workforce from Eastern Europe and the rest of the world.
On the short run, the US administration has publicly welcomed the gradual drop in the US dollar's exchange rate as a starting point for dealing with its increasing trade deficit, since a weaker US dollar value increases the competitiveness of US goods against those from Europe and Asia.
A lower US dollar exchange rate is also expected to push Asian banks to prepare themselves to interfere in financial markets to prevent the rising of exchange rates of their own currencies, in order to maintain strong sales.
This comes amid an American silence, the impact of which may be seen in the policies of US Secretary of Treasury, Henry Paulson, who laid down a policy for letting financial markets, not political statements or flagrant US interference, determine the US dollar's exchange rate. Americans, however, are pushing China to liberate its currency and raise the value of the yuan to reduce the trade definite with the US.
Statements by the Governor of the Chinese Central Bank that his country plans to diversify its monetary reserves to include currencies other than the US dollar have also convinced analysts that this will negatively impact the US dollar's exchange rate.
The Democrat Party's victory in the latest US elections also constitutes future pressures on the US relations with China; taking into consideration the fact that ingoing president of the House of Representatives has previously accused China of manipulating its currency to maintain the current trade surplus with the US.
Whether on the account of internal or external indications, the US dollar is expected to face significant pressures. World banks are also expected to take action to avoid threats posed by the US dollar. For, it is a well-known fact that a strong currency is the reflection of a strong nation. Accordingly, will a weaker US dollar impact the US' influence in the world?