Currency markets were roiled Sept. 11, when Moody's warned that the
U.S. could face a ratings downgrade if it didn't reduce its bulging
debt-to-GDP ratio.
The warning served as a reminder to investors, as if they needed it: The U.S. owes too much money.
Even as the euro faces frightening risks, one must ask, can the dollar be dethroned as the world's reserve currency? And if such an event should pass, what does that hold for the future of the U.S. economy?
Most economists believe that while the threat is growing, loss of reserve currency status is still a ways off.
A reserve currency is widely trusted and used by many governments and institutions. That trust enables these foreign entities to store much of their wealth in greenbacks. A huge chunk of global business is transacted in dollars, the world's currency. The U.S.' long history of robust economic growth and political stability has driven the dollar to reserve-currency status.
A loss of reserve status for the dollar could unleash serious problems. If vast amounts of dollars were unloaded for euros, yuan or anything else, the dollar's value would crash. That would send soaring prices of key commodities — oil, metals, some foods, for instance. Many consumer goods also would become painfully expensive. Like what? Anything from clothes to cars and kitchen appliances.
The resulting inflation surge could easily destabilize the economy. Yields would soar as foreign investors dump their holdings of U.S. Treasury debt and corporate paper — foreign investors' favorite places to stash their American cash.
Read more: http://news.investors.com/investing/092112-626588-dollars-reserve-currency-status-may-be-two-edged-sword.htm?src=HPLNews&fromcampaign=1
The warning served as a reminder to investors, as if they needed it: The U.S. owes too much money.
Even as the euro faces frightening risks, one must ask, can the dollar be dethroned as the world's reserve currency? And if such an event should pass, what does that hold for the future of the U.S. economy?
Most economists believe that while the threat is growing, loss of reserve currency status is still a ways off.
A reserve currency is widely trusted and used by many governments and institutions. That trust enables these foreign entities to store much of their wealth in greenbacks. A huge chunk of global business is transacted in dollars, the world's currency. The U.S.' long history of robust economic growth and political stability has driven the dollar to reserve-currency status.
A loss of reserve status for the dollar could unleash serious problems. If vast amounts of dollars were unloaded for euros, yuan or anything else, the dollar's value would crash. That would send soaring prices of key commodities — oil, metals, some foods, for instance. Many consumer goods also would become painfully expensive. Like what? Anything from clothes to cars and kitchen appliances.
The resulting inflation surge could easily destabilize the economy. Yields would soar as foreign investors dump their holdings of U.S. Treasury debt and corporate paper — foreign investors' favorite places to stash their American cash.
Read more: http://news.investors.com/investing/092112-626588-dollars-reserve-currency-status-may-be-two-edged-sword.htm?src=HPLNews&fromcampaign=1
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