Future of US Dollar: Implications for the Markets

The foreign exchange market is the largest, and most liquid financial market in the world, with  participation from governments, corporations, institutions, investors, central banks, contributing to  a global turnover in excess of US$3.2 trillion per day. At the heart of this global market is US Dollar, a currency which has retained a ‘monopoly’ position as reserve currency, and serves as the most widely adopted currency of international trade and capital flow. For the last two decades or so, US Ddllar’s share of global reserves has remained around 65-66%. Ever since the financial crisis of 2007-08 questions are being asked about the legitimacy of US Dollar as a reserve currency.

Historically speaking, the Federal Reserve Act was put in place in 1913, since then the value of the U.S. dollar has gone down approximately 96%. Most of this devaluation occurred after 1971 when former President Nixon repealed the Gold standard. For detractors of the Federal Reserve, it is a Corporation of Private Bankers which has nothing 'Federal' about it and it has no reserves. They see Federal Reserve as controlling a Banking system designed to enslave the US Govt. and US citizens. There are enough reasons that despite scepticism US  Dollar continues to dominate the international currency market. In the near term with low interest rates and low inflation in the US there is little threat to the dollar. The term BRIC is only on paper, with India and China at loggerheads on many issues. There are concerns about the decline of US Dollar against Euro and other Europian currencies, but there is no threat to Dollar as a trading currency in Asia and other emerging markets. 

So what is going to be the future of US Dollar in 2010, and its implications for other asset classes that are inversely related to it? There is always a hope for the dollar, that the US economy will recover, or the FED will increase the interest rates that have been pegged at artificially lower rates. However, a majority of the economists feel that the Dollar is on a continuous downward journey due to the wrong policies pursued by the FED. The rebalancing of the global economy would necessisate a lower dollar, as the current strength of the dollar propped up by the foreign Central Banks allows US citizens to import products which they cannot afford to consume. According to experts, unless the FED takes corrective measures the Dollar is headed for a collapse. When this will happen is beyond the calculations of economists, perhaps 'Crystal Gazers' could provide the answer! According to a renouned US astro-expert July-August 2010 may cause a serious collapse of the US Dollar and a crisis within the FED. The asset classes that can protect the investors in such a situation are commodities and specifically a widely traded commodity like 'Gold'. Perhaps, the theme for 2010 could be: "All that glitters is Gold." It makes sense to have 10-15% gold in your portfolio.