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Facing dollar uncertainty

Facing dollar uncertainty

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bytrevorkeidan.jpg

The US dollar is facing intense scrutiny

What does the future hold for the United States dollar?

It's a topic that has been receiving a lot of attention in the press recently. There have been wild swings in the value of the dollar against some of the major currencies.

Two weeks ago the dollar posted its biggest one-day fall since 1985 against a basket of major currencies as the US Federal Reserve announced plans to try to revive the American economy by buying Treasury bonds. This sent alarm bells ringing, raising concerns that the Fed's action would lead to an oversupply of the dollar, which would trigger a sell off.

This was compounded by China and Russia calling for a drastic change to the global monetary system. Both nations have urged that the dollar be replaced by a single global currency.

Indeed Russia is intending to put forward a proposal for the creation of a new global currency to replace the dollar at the G20 Summit in London on Thursday.

But if you were to ask US President Barack Obama, for instance, he would tell you that the dollar will be the world's reserve currency for the foreseeable future.

Should the dollar remain the world's global reserve currency, which appears likely, then the theory is that it will be in even more demand. This will decrease supply and increase demand, and therefore its value remains high - and that's good for those of us holding dollars. It's not so good for exporting American companies.

However, there is another chain of thought that the US dollar could overheat and possibly crash as a result of unprecedented, excessive demand for the currency as a safe haven. This will obviously decrease the value - which is not so good for those of us with dollars but very good for US selling overseas.

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Trevor Keidan is managing director of Infinity Financial Solutions. To contact him, please send an email to [email protected].  Trevor welcomes comments and/or questions about his articles.

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