Dollar Centricity May Soon Be Over

When a wine distributor from South Korea wants to import a cabernet from Chile he uses U.S. dollars to pay the Chilean. In fact, less than 20% of the merchandise trade of both South Korea and Chile is within the United States, but the dollar is almost the exclusive currency of foreign transaction.

In an article in the Wall Street Journal on Wednesday, Barry Eichengreen notes that the most astonishing thing about today's volatile economic climate is the fact that the U.S. dollar is still at the center of it.

The dollar is not just America's currency - it's the world's. 85% of foreign-exchange transactions are for U.S. dollars. The dollar is also the currency of 50% of all international debt securities. But many economists are predicting that the dollar's reign as the global currency is coming to an end. Here's why:

1. The dollar's worth is being eroded by changes in technology. Comparing the exchange rates between currencies was, for decades, a difficult task, so it made more sense for importers and bond issuers to quote and invoice in dollars. These days, most people have access to the internet and can check exchange rates in real time. There is now room for other currencies to thrive if they offer better rates. The Euro comes to mind as a rising example.

2. The Euro is big business. While many Americans tend to see the Euro as an unstable currency, Europeans countries have not abandoned its use. They will continue with long-term deficit reduction and will begin to issue bonds backed by the full faith and credit of the eurozone. This will mean big competition for U.S. markets.

3. The dollar is no longer secure. Foreign investors and businesses deal in U.S. dollars because that currency is considered secure. But now, U.S. debt is approaching 75% of gross domestic product and the U.S. is finding it harder to maintain the value of its currency.

Eichgreen predicts that "the dollar will have to fall by roughly 20%."  When this happens, the price of imported goods in the U.S. will rise (are there goods that aren't imported?). The living standards of most Americans will decrease to accommodate this shift. Meanwhile, economists suggest that Europeans will thrive off the dollar's demise, as the Euro flourishes and becomes a stronger international monetary unit.

Photo credit: Jeremy C Bradley