Since the end of World War II the dollar has been the currency of international trade, also known as a “reserve currency.” This has allowed the US to buy commodities for relatively little and, as international journalists have accused: print its way out of debt. However, whether this last allegation is true or not, having the US dollar as the largest international reserve currency has given the United States an enormous amount of economic power. The economic crisis has placed this power under threat as the international community looses faith in the dollar. The question is: what could replace the dollar?
The most obvious answer is the euro. Since its establishment, a number of large banks have switched to the euro, countries trade in it, and there is even talk about measuring commodities (such as oil) in the euro. This would be a major indicator that the euro is becoming the new reserve currency. However, as first the Greek and now Irish economies almost collapsed, in 2009 and 2010 respectively, the euro is starting to loose steam. Indeed, some economists are worried that the contagion will spread to Portugal and Spain.
Europe’s currency crisis has caused people to run back to the safe haven they know: the dollar. However, as dissatisfaction with the America mounts pressure is building to develop a universal international currency. The IMF has even made an official proposal, a currency called the â€œBancor,â€ and several other major banks support the idea in theory (although none have commented yet about the Bancor). This would be a major blow to the United States, who has used its control over the reserve currency to continue limping along on a huge trade deficit.
However, there is still strong opposition to having a universal currency, and not just from the US. It seems likely, therefore, that the US dollar will remain the international reserve currency at least until the end of the economic crisis.