The United States currency has for a long time been used in the international monetary system to facilitate cross border trade transactions. However, the global economic and financial crisis experienced in 2009 exposed the vulnerabilities of the U.S. currency. The effect of the crisis on the United States economy sent an array of fears among many users of the currency. On the other hand, China has emerged as a powerful participant in international trade.
The Chinese government facilitates a significant volume of trade across its borders. The Chinese government has openly challenged the reliability of the U.S. currency as a ‘key’ currency in the use of balance of trade. This has often provoked diplomatic rows between the governments of both countries. Such disagreements are often exposed on the international platforms such as the G20 Summits and the International Monetary Fund meetings.
The Chinese argues that the fact that the currency of many countries is currently pegged to the U.S. currency as a matter of policy is a worrying trend. They argue that that the recent actions taken by the United States government to respond to its financial and economic problems may have an adverse effect on the trading partners. Printing of more currency threatens the escalation of international inflation.What should the American government and IMF do?
The American government should closely control and monitor its monetary policy to ensure that its currency is stable. This will require maintaining foreign currency reserves that the Federal Reserve Bank can manage effectively. Interest rates should also be adjusted to reflect the needs of the local economy and the demands of the global market. The International Monetary Fund should ensure that the interests of all its members are upheld by implementing all policies relating to the international foreign exchange system.