The steady erosion of faith in the dollar that began with the financial crisis 5 years ago, seems to have reached boiling point with the beginning of political battles on Capitol hill. Finding a long-term alternative to the dollar as never before. Sorry, there are no alternatives, or at least, not now. Only in horror to look at economic suicide, which seems the U.S. intends to take.
More than 60 percent of global currency reserves are held in US dollar, which also accounts for more than 80 percent of global foreign exchange trading.
In addition, U.S. Treasury bonds are the very Foundation of the global financial system. They are supposedly risk-free assets with respect to which everything else is determined, and thus represent the most preferred collateral in global market transactions.
The hegemony of the dollar permeates everything. It gives him such opportunities, which was not one currency in history. If China starts to sell dollar assets, it would weaken the dollar, undermining Chinese exports and reducing the value of remaining in its portfolio of assets.
There is a General view that a U.S. default in any form will provoke a devastating chain reaction of bankruptcies that would lead to a second global financial crisis. But the senior currency strategist at HSBC David bloom is confident that the hegemony of the dollar may lead to the opposite effect, at least at first.
Unlike generalized credit event, where all instruments default at the same time worried that the U.S. could carry out a number of small self-contained defaults, or "selective defaults", the effect of each of which, in theory, should not be so powerful. Markets perceive such defaults differently when it is expected that overdue payments would be made, as soon as you reach a political compromise. It is also very possible that the damage to financial markets, the fed will try to counter the increase in monetary stimulus by buying bonds, which will begin to dump investors.
In addition, the financial uncertainty created by default would probably push investors towards the usual "quiet bays" — in particular, denominated in dollars assets. Alternative shelter offered by Japan and Switzerland, are no longer considered as such due to printing of money by Central banks. Ironically, emerging markets are likely to suffer greater damage from default of the USA, than the USA, when there will begin the outflow of capital.
These are the "exorbitant privilege" enjoyed by the dollar, when it may happen that this will be the first in the history of currency, which as a result of default will survive the rise of its value. However, if you are going to be repeated selective defaults, you will begin to unfold the second, less favorable phase. Scared the markets will begin to sell dollars.
The subsequent strengthening of the Euro and the pound will have a powerful deflationary consequences for Europe. Domestic demand in the US will also survive the collapse that would result from a painful financial tightening due to the attempts of the Federal government to balance expenditures and tax revenues.
The hegemony of the dollar has long been a destabilizing factor in the center of the international monetary system is an essential part of increasing imbalances at the global accounts and cross-border capital flows that were the basis of so many issues in the world economy. An unprecedented build-up of dollar foreign exchange reserves, in turn, turned to the U.S. and new problems, complicating the budget and maintaining financial stability within its own borders.
Policy, which may or may not be good for US, in all probability, bad for everyone else. The monetary policy of the US since the crisis began have led to unwanted demand and bubbles in assets worldwide.
A serious alternative to the dollar is still far, however, the recent commotion on Capitol hill gave her the search new impetus. The U.S. reckless devil-may-care attitude to their future.
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