As mentioned in the article Unintended Consequences I mentioned China expressed concern in the future value of the dollar with the recent spending increases. In the summer of 2008, at the first signs of the weakening economy, Iran proposed the Euro be used for energy trading. This week, China made a similar proposal, a single, an international reserve currency (to replace the dollar) managed by the International Monetary Fund (IMF).
The advantages for the US of the dollar as the reserve currency:
1) We can easily borrow against our own currency which gives us low interest rates.
2) When the US borrows against its own currency it is independent of fluctuations in other currencies, and can be paid back in less real value at maturity.
3) For now it’s the best option.
The positives for the world:
1) It will deter US racking up large deficits with an increase in interest rates.
2) It will give poorer countries access to the currency.
3) It will continue to support the union of the world into one currency.
4) With the questions about the US economy it would be better to act now then after substantial depreciation of the dollar.
5) A shared interest will lead to better stability, fairness, and transparency.
The dollar is the reserve currency now because the US is the world’s largest economy, and the $ is the most liquid form of money. The idea of creating a world currency isn’t anything new, and prior to 1972 the US dollar was pegged against gold (Bretton Woods fixed exchange). After the Bretton Woods system was dropped, inflation began to climb, and it would likely create a similar scenario with a world reserve currency. However, this will not happen anytime in the near future.