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Currency Markets: Is US dollar on its way out as world′s lead currency? - by Lars Halter

If the stability of a currency is entirely linked to the confidence in the issuer of the currency, then it does not look good for the US dollar. In Washington, US President Donald Trump appears to be busy fighting against the rest of the world.
His administration has kick-started a fierce trade conflict with China and other countries by slapping tariffs and engaging in protectionist rhetoric.

In recent weeks, Trump has also picked up quarrels with Russia and Turkey. But the two are beating back by hitting Washington where it hurts. Both Moscow and Ankara are questioning the global role of the US dollar.

Despite periodic tensions in US-Saudi relations, the pact has survived. And as demand for oil rose rapidly in the subsequent decades, the demand for US dollar also climbed. An increasing number of cross-border transactions began to be settled in the American currency.

That is still the case today. The International Monetary Fund (IMF) estimates that around 62 percent of the world's currency reserves are held in dollars. By comparison, the euro makes up about 20 percent of the currency reserves, followed by the yen and the pound sterling, which account for less than five percent.

The US dollar also plays a crucial role in forex transactions, with the currency accounting for 85 percent of the international currency exchange.

The US Federal Reserve has always supported the dollar's role as the leader of the world's currencies and provided sufficient liquidity, which has been a factor in ensuring its dominance.

Although the US central bank has so far been pursuing a steady course, the White House's recommendations and demands about interest and exchange rates create uncertainty as to whether one can always rely on the political neutrality of the Fed.

Furthermore, no one wants to bet on Trump's economic policies. His actions too often contradict his rhetoric: he speaks of large trade agreements, but has so far only withdrawn the US from them. None of his promised new deals has materialized. A trade dispute with China, uncertainty with regard to his dealings with Russia and a dispute now with Turkey, which is causing a plunge in the value of the lira. In the current economic climate, the dollar doesn't seem to be a safe bet.

Against this backdrop, the question remains: which currency in future could give the dollar a run for its money?

Russia and Turkey have announced that they want to return to national currencies in international trade — they want to avoid the detour via the dollar.

If other countries agree, the dollar could become less dominant in global trade in future, say some observers. Still, the US currency will likely remain the strongest individual national currency as long as the US enjoys greater investor confidence than that enjoyed by other countries.

Read more: US dollar on its way out as world′s lead currency? | Business| Economy and finance news from a German perspective | DW | 16.08.2018

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