Is the U.S. dollar doomed?

The world is dealing with another economic crisis and all of the currencies are falling off their thrones. The times are extra hard for $.

More than a year ago, the fourth-largest bank in America, Lehman Brothers, collapsed and marked the beginning of economic tsunami which shook seemingly strong economies all around the world.

Financial analysts take the fall of Lehman Brothers as the beginning of the worst financial crisis in the past 50 years.

The crisis shook the world economies, but its late arrival allowed our government to brace itself for the impact.

Anyone who disagrees should probably think again, because in the end, the crisis in Croatia is a relative constant that only rises and falls over time. Respondents of various surveys carried out in our country explained how they adjusted to the new situation without any major difficulties. Things got only slightly harder for them.

However, such a scenario, which for some seems like a doomsday movie, is not accepted by many countries in the world, where the crisis ate a major portion of their national product.

Dollar is the weakest link

The world's leading economies have therefore decided not to repeat the mistake which led to the general disaster and decided to follow the old recipe: expel the intruder.

Intruder, in this case, is the U.S. dollar which proved to be the weakest link in the chain of events. After 1944 Bretton Woods agreement, this popular green note replaced the British pound which, untill then, served as the currency of world reserves.

After the crisis, which shook the end of the 1920’s, it became clear that the global economy needs to be changed. The changed market economy, with American dollar at its top, remained until today; however, it is quite clear that American dollar no longer holds the strength and stability it enjoyed during the last century.

Economy of the United States, which burst like a balloon and caused many international troubles in the past year, is likely to lose many of its allies. While Barack Obama tries to come up with a solution and plans the recovery of the national industry, the rest of the world is trying to come up with a way to replace a dollar.

As much as 60 percent of world’s monetary reserves consist of dollars. The logic is simple: the dollar is weak and world reserves slowly melt to nothingness because of dollar's decreasing value.

International community turns its back to the U.S.

The first step in removing dollar from the international stage was made by Iran. Mahmoud Ahmadinejad, otherwise notorious for his ‘love’ of the United States, decided that Iran would use Euro, rather than a more common dollar, in the process of calculating the value of the oil.

It is quite clear that Ahmadinejad has not done this only because of the weakening dollar, but also because he wants to reduce the role of the US in the Middle East. Regardless of the motives of Islamic leaders, another thing that may concern financial analysts is that the UN partially mirrored Iran’s move.

Only a few days ago UN decided to suggest a change in the currency of the world reserves, a move that could possibly end a domination of the US dollar.  

Sha Zukang, the UN chief Vice secretary for Economic and Social Affairs, justified the move by saying that this would produce a ‘significant progress in addressing the international imbalance’. Currency should be removed from the world stage in order to “ensure international liquidity”.

Sha Zukang said that the ‘need for the real world currency is stronger than ever', and added how it would be wonderful if they began using IMF's transaction model, which is based on the four basket currencies: the yen, pounds, euros and dollars.

Formation of the East Asian community and the BRIC

Also, during the late September, the new Japanese Prime Minister Yukio Hatoyama, proposed the Chinese President Jintao formation of East Asian alliance, a strucure similar to the European Union.

This is not the first time that Hatoyama calls for ‘enhanced cooperation’, which promotes Japan’s desire to improve its cooperation with powerful neighborhood.

It is no secret that the establishment of such communities would introduce a new, unified currency in which the East Asian countries would become a major global competitor. Hatoyama’s goal is to get the United States off Japan’s back.

This is a big shift in Japan’s policy and it happened because the Democratic Party of Japan won the local elections for the first time since World War II. The catch lies in the fact that the new government is a lot less fonder of America than the Liberal Party was.

Brazil, Russia, India and China (BRIC), who worked diligently for years and who were ignored by many developed countries, had a difficult time in formally transforming relations in the global economy. It seems that the time in which inadequate systems of world currencies will be replaced, has begun.

Poor Brazil develops rapidly, the same goes for Russia, India leads the world in placing new (cheaper) IT technologies, while China already leads ahead of the United States since it bought much of their external debt. In any case, all of these countries are a threat for the economic supremacy of the US.

1929 crisis ‘ate’ the pound, will this happen to a dollar?

However, only time can tell whether the dollar will survive the tide of rising economies and strengthening of other international currencies.

Finally, the question remains whether the 2008 crisis will remove dollar subsequently - just like the dollar succeeded British pound in Bretton Woods agreement - ten years after the 1929 crisis.

Read the predictions on the outcome of the dollar provided by the distinguished economic analyst Zarko Primorac:

U.S. dollar plays a dual role of the US's national currency  and the currency of the world's reserves. Role of dollars, as the world's reserve currency has brought enormous benefits for the U.S. economy, because they could profit on the expansion of economic and military powers in the world. In recent years the situation has had some serious changes. United States realized enormous internal expenditure and financing of American expansion in the world through the huge budget deficits, which weakened dollar in the international financial stage.

In addition, the changes in the international relations occurred, especially due to the large economic rise of China, India, Brazil and Russia. It is known that China produces more than it consumes, unlike the U.S., which spends more than it produces and generates large trade surpluses.

In order to compensate for this, they formed relationships in which China, and some other countries, became a major financier of American budget deficit. In the meantime, their foreign exchange reserves still accumulated large amounts of dollars.

It is understandable that continually weakening U.S. currency jeopardizes the creditors of the United States as well as those whose exports are primarily oriented towards the American market.

It must be added that the current global financial crisis seriously shook dollar by the mere fact that it began in the American financial markets and that it still shakes the U.S. banking system. That is why increased number of requests to switch the world reserve currency are heard, that is why formation of a new financial media is requested and that is why a more stable currency is sought after.

Achieving international agreement in the polarized world is not easy

A lot of time tends to pass before the decisions of this magnitude are passed. In fact, the U.S. economy, in spite of its reduced global dominance, is still the strongest nation. And it will remain so in the coming years and probably in the coming decades - at least until the second half of this century. Until this is so, the U.S. currency will dominate the world in spite the new monetary alliances and possibly, new currencies.

In addition, the U.S. will seek to preserve the stability of the dollar and it already does – by trying to reduce the budget deficit, by reducing military activity in the world and in other ways. And third, not the least important reason, is that a radical change in the structure of the international financial system requires an international agreement. This agreement should be made by the leading economic and political forces. However, in this polarized world, achieving something like that is a daunting task.