International Currency Essay Example | Topics and Well Written Essays - 5000 words

International Currency - Essay Example However, it is not secret that dozens of countries all over the world including Great Britain define the value of their currencies through a fixed exchange rate with the dollar. Many others, especially in Asia, keep their currencies tightly linked to the U.S. currency (Altman, 2004) Much of the world has come to realize that the dollar's value is steadily being undermined. But few Americans understand that the government along with the Federal Reserve is accomplishing the undermining. And few also realize that the main cause of the continuing failure of the American dollar is federal indebtedness brought on by virtually uncontrolled federal spending. Responding to the vast hole they have dug for all Americans, the US leaders have paid the nation's bills by borrowing from almost every corner of the globe and by creating more currency out of nothing (inflation). According to the statistics from 2006, the YS current-account deficit equals $857 billion that is absorbing the major part of the world's capital outflows. To finance this constant deficit, the United States has accumulated trillions of dollars of foreign debt, depreciating their currency, the dollar, and appreciating other world currencies. Current paper looks at the trends and implications of the "cheap " US dollar and its effects on the world major currencies, emphasis the British pound. Causes of the dollar decline Since the introduction of the euro in 1999, the US experiences severe balance of payments deficits on current account. The biggest deficits were with China and Japan. However, in order to protect their export competitiveness, both China and Japan followed macroeconomic policies that would maintain fixed exchange rates between their currencies and the US dollar. In order to accomplish this result, both China and Japan had to intervene in the foreign exchange market by buying up massive amounts of US dollars while selling corresponding amounts of their own currencies, the Chinese Yuan and the Japanese yen. These purchase showed up as capital inflows into the US. However, as the US continued to maintain historically low interest rates to stimulate its domestic economy, some critics wondered if China and Japan would continue to hold so many US dollars (Eiteman, Stonehill, Moffett 2007). As a result of extensive US exports, the country has become the world's largest debtor, rather than th e world's largest creditor, the position it held in earlier years. Net foreign purchases of US securities have retreated from their peak in 2001, while the US balance of current accounts has worsened, as show in Figure 1. Figure 1: Balance of US current account 1960-2001 According to APF Business news1, the US balance of payments deficit narrowed in the second quarter to 190.8 billion dollars from 197.1 billion in the first quarter, the Commerce Department reported Friday. The US current account figure, roughly in line with analysts' forecasts, represented 5.5 percent of US economic output or gross domestic product. For the first quarter, the current account deficit was revised up to 197.1 billion dollars or 5.8 percent of GDP. The improvement in the current account deficit, the broadest measure of trade and income flows, suggested some easing of balance of paymen