The foreign currency is usually held country's central banks and other financial institutions. This currency is used to pay the international debt and trade obligation or to influence the domestic exchange rate. In the international trade of the commodities such as the gold and oil are priced and measured in using the reserved currency. This contributes to the holding of the currency by other countries for the exchange of the products.
The holding of such currency reserves helps in the exchange rates risks reduction. The purchase of the product and good is done in the manner that has standardization of the currency. This helps reducing the risk in that country that is purchasing a product in the international market not incur the cost of changing their currency to make a purchase. The United State Dollar has been accepted widely as the primary reserve currency that is employed by most of the countries. This has, therefore, made the foreign countries evaluate and monitor more closely their monetary policies in relation to United States. This helps in ensuring the value of the currency reserve is not affected by the inflation.
Therefore, the United States Dollar cannot lose the as the reserve currency as it is used by the majority of the countries in their international and local trades. This has made it stable and the reference to all other domination currencies of the respective countries. The United States dollar has now been accepted and used in the stock market by the investors. This has contributed in making a dollar a strong currency.
The foreign country's government and central banks have the chance of purchasing the United States debt. This makes the United States government run and spending much of the money in the deficit that has the lower rate of the interest. This is as a result of the option of investment using the dollar making the United States treasuries. The major buyers of the dollar as the through the United States government debt is the China and Japan governments.
Ramification of the United Dollar in case of loosing as reserve currency
The currency has been employed as the one of the major subsidy to the Americans citizens. This has resulted as the foreign countries using the dollars in the purchase of the United States government debt. In an additional, the immigrants in the United States usually take the dollars in cash to their countries and the relatives. This is considered as the deflationary for making the prices of the local consumers cheaper.
In the past few years, this was expected that United State to lose its status in the dollar being the reserve currency. This can be as the proof that is justified as the Federal Reserve has constantly being adjusting the county's monetary base. If this took place, the countries that have based their currency valuation with the United States would experience destabilization in their currencies. This would be extended to the entire world leading to economic imbalance especially in the balance of payment.
Therefore, if the dollar can lose its value due to the price rise, the rate of the inflation affects the countries that trade using the dollar currency. This is extended to those countries basing their currency value with the dollar. In conclusion, if the U.S dollar can be changed or lose as the reserve currency, this effect can be felt in the large part of the world economy.
