Why Hasn’t The Dollar Plunged? Gold-Standard Currency

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    Mar 21, 2014 11:23 PM GMT
    All of these circumstances would predict, under normal economic theory, a decline in both the value and the importance of the dollar. Strangely, this hasn’t occurred — instead, quite the opposite.

    There are three principal reasons why investors continue to turn mainly to the dollar for safety: First, emerging market economies such as Brazil and India, and even richer countries like South Korea, have a stronger incentive than ever to accumulate vast stores of foreign currency reserves. This protects their currencies from speculative attacks and insulates their economies from volatile capital flows. Governments are now trying to restore reserves that they used during the crisis to shore up their currencies and banks.

    Second, regulatory reforms agreed to by the major advanced and emerging-market economies have increased the demand for safe assets among financial institutions. New regulations require the biggest American and European banks to hold larger buffers of liquid and safe assets. Since the implosion of the market for mortgage-backed securities, private-sector investments are hardly seen as safe anymore. The market for gold is too small and volatile for it to be a realistic alternative.

    Third, the supply of safe assets has shrunk. Bonds issued by most euro-zone countries look shaky in the aftermath of the euro-zone debt crisis, especially since many of these countries face weak growth prospects. Countries like Japan and Switzerland have taken steps to weaken their currencies (thereby shoring up their exports) and are intervening in foreign exchange markets to prevent their currencies from appreciating in value. Thus they are adding to the demand for safe assets.

  • tj85016

    Posts: 4123

    Mar 22, 2014 3:59 AM GMT
    that'a easy, the US MAKES sure there's demand for the dollar. Any country that tries to get off the dollar standard or price oil in another currency (say the yuan) will have "trouble."

    Just ask Libya
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    Mar 22, 2014 4:55 PM GMT
    The instructor in me feels the need to tell you that you should be more clear about what is written by you and what is coming from the article.
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    Mar 23, 2014 4:30 PM GMT
    Am paraphrasing the article to get a discussion started.