Critique: Universal Currency

In Unique’s blog about universal currency she states many reasons why there should not be one. I agree with her position, because part of a countries identity is its currency. This is how countries gain reputation among others, by having a strong currency. Also, having different currencies promotes nationalism. For years the US dollar has been a reliable currency, and is commonly used in international markets due to confidence of the government’s ability to back up the USD.

That confidence is now at risk. There’s legitimate fear that the dollar is a less reliable repository of value because of long-standing, growing deficits suddenly compounded by the billions being committed to bail-outs and economic stimulus.

Since the USD has been a staple in the currency market, there has not been a direct alternative to it that has the reach and circulation. Many people have invested in US bonds, so when the USD decreases in value so does the value of their investment. The domestic currency gets stronger while the foreign currency gets stronger(in terms of US).



Globalization has established trade levels that have never been recorded, but is occurring in the absence of broadly based universal currency standards. The largest trading partner of the US, China, use to hold 90% of their reserves in USD, and are now reducing this figure due to the weakening dollar.

Unique also states that with a universal currency there will need to have universal banks and interest rates. If this were to occur, it would be easier to assess risks on loans, because of the same standard set across the board. Creating a universal currency would create more stability, but would make a part of the financial sector become obsolete. With one currency there would no longer be a need for an international currency exchange (FOREX). By using a universal currency there is no further use for financial tools such as foreign FRA’s and swaps, since there will only be one currency. So, as a trader you would no longer be able to speculate on foreign currency markets, where speculating is the main reason why people trade on FOREX. Traders have no intention in taking the currency in which they are speculating in.

According to wikipedia the purpose of FOREX is to facilitate trade and investment. This market is one of the largest and most liquid financial markets in the world, and involves large banks, governments, and currency speculators. Major currencies are traded on the FOREX, as well as lesser familiar currencies. Thus, this market makes it easier for countries to change the currency they are holding. For example, if you are holding yen, you can easily exchange this for USD or British pound sterling. Etc.

Troubled countries that face high inflation rates, and political instability would benefit both economically and financially from a universal currency.

Links:
http://uniquebl0gs.blogspot.com/

http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-5-2006_A_10000000000000563358

http://en.wikipedia.org/wiki/Forex