Long Term Evaluations on the U.S. Dollar

The seemingly endless stream of bleak economic data, and the precipitous decline of the US. Dollar in the forex currencies market, have led to all sorts of speculations and conjectures. There is general agreement that in the short term the U.S. Dollar will continue to weaken, but over the long term there is no consensus.

As grim as the situation is for the greenback in the forex today, there are those who believe that the situation will only worsen in the long run. While it is the currency reserve of the world, and the base currency in the forex market, some investors and analysts see the U.S. Dollar losing more ground and will eventually have to give up its position as the reserve currency.

Some investors are now seeking refuge in commodities like gold and platinum, and others are opting for the stronger and emerging currencies like the Euro and Yuan. Those who believe that the U.S. Dollar will fall even more point to other signs.

Kuwait has un-pegged its currency from the greenback, citing financial losses and instability. At the latest meeting of OPEC leaders the suggestion that another currency be used as a basis to peg oil prices was brought up.

Although the proposal by Iran and Venezuela that the U.S. Dollar be dropped in favor of the Euro was rejected -for now- the other OPEC leaders were open to the possibility of using "a basket of currencies" as alternatives to the Dollar.

The reason given as to why the Dollar should not be abandoned was that such as move would lead to the greenback's total collapse. And that is precisely why some forex analysts believe that the Dollar, for all its weaknesses, will remain the base currency in the forex. It is simply in the best interest of other nations to have a strong U.S. Dollar.

For instance, while the Gulf Coast Council (GCC) announced that it was looking at shifting to other currencies, it is unlikely to significantly affect dollar denominated assets and investments. Currently the United States accounts for more than half the total petrodollar investments in the world. A testament to this fact is the recent infusion of over $7 billion by the Abu Dhabi Investment Authority into Citigroup.

It should be noted that Citigroup is one of the hardest hit banks by the subprime crisis that has afflicted the financial and forex markets, yet the fact that the investment was made shows the belief in the long term prospects of the U.S. economy. The Yuan is also heavily dependent on a strong greenback. Because it is artificially kept low by China, their exports have been raking in the profits, mainly from the United States.

If the Dollar were to collapse, it could force the Chinese government to devaluate the Yuan, the results of which can only be guessed.

Related to the question of the U.S. Dollar is whether the Fed will step in the forex, as it did back in 1994. Although anything is possible right now, the opinion of most forex analysts is that it is unlikely, given the failure in the 1994 attempt.

There are several questions concerning the U.S. Dollar, and whether it will be able to retain its status as the reserve currency of choice is still unclear. But the fact is that, for lack of an alternative (for now), the global economy needs a strong Dollar.