Floating Rate US Dollar System

Our current Floating Rate US Dollar System or what some refer to as the “Fiat Money Standard” allows major currencies to float against one another. The market prices are based primarily on supply and demand. It’s a system that historically there is no parallel.

It really seems nonsensical that a global monetary regime can grow out of a fiat monetary system whereby there is no real backing of value for the currency other than promises by politicians. But following the breakdown of Bretton Woods that’s the system we are stuck with, which has surprisingly served us better than expected. And the U.S. dollar is at the center.

Approximately 64 percent of foreign exchange reserves are denominated in U.S. dollars. That’s up about 8 percentage points since 1995, but down about 20 points since 1973. And about 60 percent of world trade is invoiced in dollars.

Ultimately the dollar’s position rests on faith of those who hold it and accept it as the standard … there is no guarantee this faith will be maintained in the future. And rightfully many are concerned given turmoil of the credit crunch and related global imbalances, coupled with irresponsible fiscal spending and debt creation by the U.S. government.

When we add the weight of this to the Fed’s dollar devaluation policy in an effort to reflate the global economy, it’s understandable why many expect this to be the disruptive shock that alters the equilibrium and ushers in a new international money.

The above article is written in part by author, Jack Crooks who writes for Money and Markets.com.

Anthony DiChi,
Your friend in Forex Currency Trading, FX Information and Forex News at TradeCurrencyNow