FIN 4244 8IB1 GLOBAL BANKING & FINANCE INDIVIDUAL ASSIGNMENT MS NORSYARMILLA BINTI MOKHTAR

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THE DEFINITION OF INTERNATIONAL CURRENCY A foreign currency that hold by the central bank and main financial institutions as a means to pay off the international debt obligations or influence the domestic exchange rate. (Investopedia, n,d) In other words, international currency can be regarded as a currency that not only used in issue country but also used by other countries. Basically, gold and oil has been used as the foundation in the reserve currency. In other words, it led every countries of the world to hold this currency as the primary method of exchange the goods in world market. Therefore, there are 3 major components for a currency of a country to become an international currency in the world. First of all, the country must have supreme power in their economic. It can only happen when the goods export and the capital export of the country occupied an important place in the global market. In order to become an international currency, the country needs to develop a close trade and financial ties with the other countries. Only at this moment, its credit currency might be able to be used and accepted in the global market. Secondly, there must have the high degree of stability in this credit currency. As a result, the credit currency itself doesnt contain any value. In order to maintain the high degree of stability of the reserve currency, it has to closely tie to the gold. Hence, the credit currency will be able to exchange into gold in certain condition based on the exchange rate of that time. Therefore, the country must have sufficient gold reserve in their exchequer in order to maintain the high degree of the stability of their credit currency. Thirdly, it has to receive the approval and confirmation of all countries in the world. Although a countrys currency can be looked upon as a way to trade and payment between country and country, but it cannot make it officially as an international currency. In order to become an international currency, the country must be recognized from the countries of the world. In other words, it has to go through the international agreement and signed up by most of the countries. If there is a change among these 3 components, the credit currency of the country might not be able to regard as an international currency anymore.

HOW USD ROSE TO BECOME AN INTERNATIONAL CURRENCY During The World War 1, United States had successful to grow its economic power by providing its supply of raw material and munitions to the countries who involved in the war. Most of the Europe country bought a large amount of weapons from US by using the gold as the method of payment. As a result, US had achieved their most outstanding gold reserve and their economic power is far more exceed to other stronger power at that time. Due to The World War 2, the international economic system had collapsed as the world was having the most turbulent period. In order to bring an end to this situation, 730 delegates from all 44 Allied nations were invited to come to the Mount Washington Hotel in Bretton Woods, New Hampshire, United States as a mean to rebuild the major international economic system. (Eric deCarbonnel, 2008) Historically, this meeting is called as the United Nation Monetary and Financial Conference or known as the Bretton Woods Conference. After three week of negotiation, delegates from different countries signed the Bretton Woods Agreement on 22nd July 1944. (Eric deCarbonnel, 2008) In order to regulate the international monetary system, International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) were established by the planners of Bretton Woods. Under the consent of most of the majority countries, they start to implement their duty in 1945. (Eric deCarbonnel, 2008) IBRD is also known as the one of the member of World Bank Group now. (The World Bank, 2013) Under the Bretton Woods system, every country has the obligation to adopt a monetary policy which can stabilize the exchange rate of their country currency. By doing so, they need to tie themselves closely with the US dollar within a fixed value-plus or minus one percent-in-term of gold. Besides, every country has the duty to acknowledge the capacity of IMF to bridge temporary imbalance of payments. (Eric deCarbonnel, 2008) Due to the increasing pressure faced by the United States, the US government unilaterally suspends the convertibility of US dollar to gold in 15th August 1971 which brought the Bretton Woods System come to an end. Thank to this, it create the special situation to the US and make the US dollar become the reserve currency for the countries which had signed the Bretton Woods Agreement in 1944. (Eric deCarbonnel, 2008)

THE FACTORS THAT SUPPORT USD AS AN INTERNATIONAL CURRENCY First of all, the factor that determines the US dollar as international currency is the economic power that it holds. Compare to most of the countries in the world, the GDP and trade volume of US is much higher than other states. By this I mean, this create the higher demand of the dollar. United States as a center of demand, it has a strong consumer sector and free from government intervention which increased the accessibility for the currency exchange. Secondly, US have a high degree of military deference which makes it have the greater power to convince the other countries to accept the dollar as the international currency. In other words, countries which need the military power of US must show their support in order to receive the protection of the United States. As the economic and military powerhouse, every country will try to have the good relationship with US. Thank to this, it make dollar have the bargaining counter to become the reserve currency. Thirdly, United States had developed a overall good relation with countries of the world. In order to become an international currency, country must need to have a high international prestige and maintain the good diplomatic relation with other countries. (Forex traders, 2013) In this respect, United States did it well. As we can see, they had signed a lot of free trade agreement with many countries and developed a good relation with its alliances all over the world. Lastly, United States is the ideal model of stability and credibility among the nations. (Forex traders, 2013) As we know, United Stated is the one of the most countries who had the greatest credibility of the world. In other words, most of the countries will agree with what they said and believe what they promise. This can be result in the reserve capacity of US dollar in the World Central Bank. As a result, it makes the world believe that dollar has the dominant power to be the dominant international currency of the world.

THE FUTURE OF USD & THE WAY TO RETAIN ITS POSITION Based on the current economical situation of United Stated, many experts from different countries predict that America will definitely fall in the future. By this I mean, United States is experiencing with a serious currency crisis. If it cannot figure out a solution to solve this, the dollar might lose its supreme position as reserve currency in the world. Compared to the current account of other countries, United States is having a great deficit of $426 billion which needs a very large amount of fund to cover it. (Eamonn Fingleton, 2013) Referring to the case that happened in recently, partially of US government had shut down due to the different opinion hold by the lawmaker about the issue of federal budget. By this I mean, this can cause eight hundred thousand of American lost their job and this will increase unemployment rate in moment. Due to this, USD drop against most of the other currencies after the government made the announcement. This might shake the confidence of the foreign investors and weaken the economy strength of US. If the lawmaker cannot come out with a mutual agreement, USD might lose its supreme position as international currency in the world. The main reason why the dollar still can retain its position as reserve currency is because of the intervention of Japan and China. As a mean to maintain the low currency, China and Japan had bought a large amount of US Treasury Bond for years. Besides, Federal Reserve had tried their best to purchase as much as many deficit of the Federal government. Therefore, these are the factors make the US dollar able to maintain its status as a reserve currency of the world until now. At the same time, euro debt crisis had been under controlled and it starts to grow stronger which can result in its current account which gain the $208 billion of surplus. . (Eamonn Fingleton, 2013) In addition, China is growing up and it seems like have an intention to replace the position of the US dollar as a reserve currency to its own currency. Therefore, we can see that United Stated is in danger now and the reserve currency might be replaced by any other currency in the distance future.

However, there still have some chances for United States to retain its position against other currencies. First of all, Federal government had to find out a way to achieve the high rate of growth in order to make OPEC countries believe that dollar will remain stable in the long-term. Secondly, United Stated has to ensure that the oil payment always made by dollar. By this I mean, it will make US dollar has the equivalent value as the oil. This is somehow the way they used it in the past, they linked their currency equal to the value of gold. (Thomas E. Vass, 2013) As a result, they must convince the world central bank to believe that there is no other alternative of reserve currency can be used like US dollar. Besides, United States must start to control the inflation rate and ensure that the inflation rate is maintained at a safe level. By this I mean, federal states should impose the price control policy in order to prevent the price go up too much. In addition, they should also try to stimulate the saving. In other words, US should spend their saving in investment or enhance the technology. By doing this, the revenue will increase significantly and this can boost the growth of GDP. Therefore, US government should encourage their people to spend more in order to increase the GDP and this might be helpful for America to remain its position as an international currency. Apart from that, the federal states must try to figure a way to balance their budget receipts and expenditure. In other words, US must try their best to get the positive balance in order to achieve government budget surplus over the year. In order to avoid getting the deficit, government should reduce the spending on unnecessary stuff and might consider the increase the taxes. In addition, US government should also put the layoff of the military force into the consideration in order to save the military expenses. As a result, US might be able to retain its position as a global currency for a while. In conclusion, if US government cannot come out with a solution that can significantly change their federal budget from deficit to surplus and reduce their national debt, they might face an unprecedented fiscal crisis in future. Some economist expert believed that the day of America economic hegemony is numbered. Once America goes bankrupt in someday, USD will become a piece of paper and it worth nothing at all. Therefore, USD cannot be used as an international currency anymore as their currency has no value.

REFERENCES Eamonn Fingleton, 2013, Apocalypse Soon: The U.S. Dollar's Grim Future -- And How To Prepare For It. [online] Available at: http://www.forbes.com/sites/eamonnfingleton/2013/07/15/apocalypse-soon-the-u-sdollars-grim-future-and-how-to-prepare-for-it/ [Accessed 28th September 2013] Eric deCarbonnel, 2008, How The Dollar Became The Worlds Reserve Currency. [online] Available at: http://www.marketskeptics.com/2008/12/how-dollar-became-

worlds-reserve.html [Accessed 28th September 2013] Forex traders, 2013, Understanding a Global Currency: What Makes the Dollar the Reserve Currency of the World. [online] Available at:

http://www.forextraders.com/forex-analysis/forex-fundamental-analysis/understanding-aglobal-currency-what-makes-the-dollar-the-reserve-currency-of-the-world.html [Accessed 28th September 2013] Investopedia, n,d, Definition of 'Reserve Currency'. [online] Available at:

http://www.investopedia.com/terms/r/reservecurrency.asp [Accessed 28th September 2013] The World Bank, 2013, Five Institutions. [online] Available at: http://www.worldbank.org/en/about [Accessed 28th September 2013] Thomas E. Vass, 2013, The Uncertain Future of the US Dollar as the Global Reserve Currency. [online] Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2222784 [Accessed 28th September 2013]