Some have voiced concerned about the US dollar being the unit of reference for m

Question

Some have voiced concerned about the US dollar being the unit of reference for much of international trade. List 3 consequences of the US dollar losing this unique status and being replaced by a basket of 4 currencies.

Assume the company for which you work is considering investing directly in Brazil by building a plant in Rio. You have worked in that project for 2 years and just as the decision to go ahead is to be made, the Real (Brazil’s currency) suddenly devalues by 20 percent. List 2 positive and 2 negative consequences of the devaluation.

Explanation / Answer

The dollar has been a stalwart of international trade over the majority of the last century. Around the time of the formation of the Eurozone, it reached its recent peak at 71.0% of official foreign exchange reserves. Since then, its composition of global reserves has more recently dropped to a more modest 62.9% in 2014.Advantages of devaluation

The most recent culmination of these trends is the creation of the Asian Infrastructure Investment Bank (AIIB), a China-led rival to the World Bank and IMF that includes 57 founding countries and $100 billion of capital. The United States is not a member and has actively lobbied its allies to avoid joining due to perceived governance issues.

The Rise of the Chinese Yuan?

Those predicting the demise of the U.S. dollar point to China as a major concern. China is pushing hard to have the renminbi , or yuan, lifted to a reserve currency status. By gaining reserve status, central banks might begin to increase their yuan holdings. The Chinese government has been pleading its case to the IMF. It must prove that the yuan is available for use in international markets. China has discussed opening up its markets to international investment.

However, China decided unexpectedly to devalue the yuan in August 2015. In a move that surprised international markets, China devalued the yuan, causing the largest one-day loss in 20 years. This seems to conflict with its attempt

The dollar, euros to become a reserve currency.

An excerpt from 6th October 2015 Bloomberg Newsro and British pound remained the top three currencies, with the share of payment volumes at 45 percent, 27 percent and 8.5 percent, respectively, according to the report. The yuan earlier this year had already become Asia’s most-active currency for payments to China and Hong Kong, Swift said in the statement.

Disadvantages of devaluation

1. Is likely to cause inflation because:

2. Reduces the purchasing power of citizens abroad. e.g. more expensive to go on holiday abroad.

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