Posts Tagged ‘US Dollar’

Libor and the Dollar

Thursday, March 5th, 2009

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Libor or the London Interbank Offered Rate, was introduced in early 1984 after it became apparent that an increasing number of banks were trading actively in a variety of relatively new market tools. The British Bankers’ Association (BBA) noted that these new tools notably interest rate swaps, foreign currency options and forward rate agreements, brought in more business and greater intensity to the London Interbank Market. However they were also worried that future growth would be hindered unless there was a standard introduced.

Hence, Libor was introduced as a standard and would become the British Bankers Association’s yardstick for interest swap rates.  This standard also incorporated the fixing of BBA interest settlement rates which became a part of the overall package officially known as the BAIRS terms – the BBA standard for interest swap rates. Ever since it was introduced, the Libor has been used as the official standard for calculating the rate of reference for the British Pound Sterling and other currencies including the US dollar.

Every weekday morning, as the clock ticks round to 11, a group of six people put together this world’s most important number. This number will later determine the day’s Libor rate or rather the rate banks charge when they lend each other money. To get a sense of the importance of Libor to the financial system you only have to look at the precautions that the team goes to make sure that the figure always gets published on time.

The group is equipped with an emergency evacuation office in Canary Wharf, London. They also have another permanently staffed office at a secret location outside London. Every team member also has a dedicated phone line in their home in case they are prevented from getting to the office, by an incident such as a terrorist attack. Nothing is allowed to come between Libor and the wider world.

However serious questions about the credibility of the Libor were raised, after a study released by the Wall Street Journal, revealed that banks may have downplayed borrowing costs they reported for LIBOR during the 2008 credit crisis. The immediate impact of this meant that banks could have created a false impression about their borrowing. By using the LIBOR to their advantage banks could create an impression that they could borrow from other financial institutions more cheaply than they could in reality. This meant that although the banks were suffering they appeared to be much healthier.

The BBA conducted an internal investigation, and announced that the LIBOR is definitely dependable and can be relied on even during the financial crisis. This was supported by other authorities including the Bank for International Settlements. It was also found that “Although the integrity of the U.S dollar LIBOR fixing process has been questioned by some market participants and the financial press, it appears that U.S. dollar LIBOR remains an accurate measure of a typical creditworthy bank’s marginal cost of unsecured U.S. dollar term funding”

As the U.S. government was set to propose more massive spending to help fight recession, the LIBOR for the U.S dollar increased even as the rate for Euros slipped to a record low. Analysts said that more government aid for the economy would keep dollar Libor rates on a mildly rising trend as the government would likely have to borrow more funds. Under such circumstances, banks do not want to lend out their spare liquidity because there is uncertainty - both about whether the bank will need the cash itself in coming months, and about the financial health of the borrowing bank.

As Libor measures the rates at which banks are prepared to lend to each other, it follows that it also determine the rate at which they are prepared to lend to their customers. It eventually goes on to set the rate of $360 trillion (£210 trillion) worth of financial products worldwide, ranging from mortgage rates to car loans. The big institutions are increasingly dependent on the central banks for cash and until this ends we’ll not see Libor rates falling.

So despite its daily fluctuations, it seems that the lack of trust between banks has rendered the market almost silent.But with the eyes of politicians, bankers and customers fixed on the daily Libor numbers, it seems unlikely that the attention on this world’s most important number will disappear.

The Rate Of The United States Dollar

Tuesday, November 11th, 2008

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The United States Dollar is the single most recognized paper currency in the world. Not only does support allrate united states dollar major transactions, whether domestically and internationally, but it is also the most used and preferred currency in the business world today, internationally. Understanding and knowing the value and the rate of the United States Dollar against other major foreign currencies and the impacts it has on the financial markets can do a lot for those who have or are planning to invest in the international financial markets. The rate of the United States dollar has and will continue to be the fundamental basis for many other international currencies, for many years to come.

The rate of the United Dollars is also the most telling indicator in gauging the status of the United States economy. This is because by simply knowing its rate, one will also be able to compare the strength of the economy of the United States against the economies of the nations and countries around the world. Because the international currency markets are based on the simple practice of trading with multiple different currencies, knowing the rate of the United States dollar will give an extra edge against the odds of making a profit when investing in this form of market. This is because the currency market is the single largest market in the world and the the United States dollar, given its vast use and utilization, plays a huge and significant role in ensuring a constant and lucrative worth in gain upon investment.

united states dollarThe rate of the United States dollar will also determine many other things, like the price of groceries or clothing, to spending on vacations overseas through exchange rates, to the price of gas and utilities. How much value it carries depends solely on the economy of the United States. The United States Dollar is also kept as a reserve currency amongst nations and countries, all around the world, which gives it that added influence in determining the strength of the global economy. It is also used as the major form of payment for raw materials, especially in the energy sector, making it even that more indispensable. Knowing the rate of the United States dollar will also tremendously help in analyzing the risk of investing in the forex market, so being able to tell how much the dollar is worth will allow investors to identify where to best trade their investments to allow a profitable income to be made from the international currency exchange markets.

It is safe to conclude that the rate of the United States dollar is the single driving force in the currency and financial markets today, and while other international currencies may influence the markets to a certain degree, the rate of the United States dollar is still the most important as it is considered the most credible and safest investment in term of currency trading. There are so many ways to learn about the rate of the United States dollar and its correlation with the international currency market and the internet is one of them.

The Dollar Bill and The US Economy

Monday, November 10th, 2008

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Throughout history, the dollar bill has seen the best and worst of times, and the current economic state ofdollar bill economy the country leaves very little to say about the positive impacts it once had in the international markets. The trillion dollar question that’s been running through the minds of so many today is: will the US dollar continue to decline in value or will it elusively begin to rise against all odds and obstacles, and make a come back again, more stronger and resilient than ever?

The value of the dollar bill declines when it loses its value in correlation to other foreign currencies. This results in diminished purchasing power on foreign trade, which will surely increase the price of imports, further causing inflation. When this happens, foreign investors will begin to sell of their US holdings, and the imminent crumbling of the financial market will ensue. It doesn’t help that the country’s current deficits amounting to trillions of dollars is owed to foreign countries through heavy lending, neither.

Due to this and much more, the dollar has lost almost half its value in the last decade alone, further fuelling speculation amongst creditor nations that the United States Government isn’t doing all it can in supporting the US dollar, partly because a weaker dollar would mean that the United States will not have to fork out as much money to pay back their creditors. The drawback to this is, these countries, realizing this, would revert their reserves to other more stable currencies like the Euro to minimize their loses. If this continue on the value of US investments will begin to erode, further invigorating inflation and the collapse of the US dollar.

The introduction of the Euro could also mean the probable replacement of the dollar as the preferred major international reserve currency, as is seen in the current oil trading markets which are proposing the use of the Euro instead of the dollar to aid trade. One of the largest investors of the US dollar is Japan, which means that in the case of an economic surge, the country, in its interest, could sells off its US holdings, increasing the national prime lending rate and strengthening the yen against the dollar.

treasury buildingGiven all these, many financial experts say that the US dollar will not continue to collapse because it is backed by the US government, making it the world’s safest reserve currency. Thanks to the emerging of more and more sophisticated financial markets today, the US dollar has also become a universal medium of exchange, and a transition to another currency seems all too bleak. Another reason why the US dollar will probably remain its hold globally is because it is currently the only currency accepted in any oil contracts, a source of energy that the entire world is so dependable on.

In short, it is not in the best interest of the international communities to allow the US dollar to collapse, as so much has been vested in it, and for credible reasons. This alone would ensure the strength and prosperity of the dollar bill in the many years to come.

Dollarization

Wednesday, September 24th, 2008

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dollarizationDollarization, in a nutshell, transpires when a nation uses foreign currency to substitute theirs. Although the terminology may have different interpretations, officially what happens is a country ceases the use of their own domestic currency and opts for a much stabile foreign currency, usually to help aid their already ailing economies. Although similar in effect, dollarization is another slow but sure-fix alternative to pegging or maintaining a floating currency, which are all efficient methods in endowing a much steady and secure economic and investment environment.

So far, currencies that have been officially used for dollarization are the United States dollar, the Euro, the Australian dollar, the Russian ruble, the Swiss franc, the Indian rupee, the New Zealand dollar, and the Turkish new lira.

Today, more countries in the world have dollarized their currencies to the US dollar as compared to any other foreign money. Amongst some of the countries that have adopted the US dollar as legal tender are British Virgin Islands, East Timor, Marshall Islands, Ecuador, Federated States of Micronesia, El Salvador, Turks and Caicos Islands, Palau, and Panama. These countries may have opted for dollarization due to its emerging and transitional economies, or could also have had owing issues with rising inflation.

Dollarization wasn’t always an approachable option though, as it was previously believed to be not viable on a political stand point. However this changed in 1999, when it began gaining a reputation as an implementable strategy by a number of countries in dire need of an economic surge. This was probably because it was thought to be the most instrumental strategy in lowering inflation and promoting better financial strength.

Many of these countries may have also already been using US dollar informally in prior to fully engaging in dollarization, probably in private or public transactions, banks accounts or even contracts. The full switch to foreign legal tender would mean that individuals and institutions were beginning to desperately protect their interests against an imminent and fore-seeable devaluation of their local exchange rate. Dollarizing their economies would also mean that their financial markets become more credible, ending any further damaging financial speculations and further stifling capital markets. The fact that the disparities in exchange rate is no longer a threat is also a driving factor behind the reduction of interests on foreign lending.

Apart from many of its advantages, dollarization also has its short-comings. One of the main disadvantages of dollarization is a nation virtually gives up its right to directly control its own economy or administer any monetary policies, and its ability to manage exchange rates. This is primarily because with dollarization the country no longer prints its own currency.

Another drawback to dollarization is the practicing country will no longer be able to collect any profits from the issuing of currency. This happens when the cost of producing the currency is lower than the actual currency itself. The US Federal Reserve collects all profits in this instance. Apart from the negative impact this has on GDP, the country in its entirety also suffers a significant loss of income.

Dollarization also robs a nation of its sense of individualism, due to the autonomous financial and economic policy that’s conditioned with it. Whatever the pros and cons of dollarization may be, experts say that it is only to be used as an extreme alternative, as most countries that have adopted it finds it a process that is almost impossible to reverse, without causing long lasting financial repercussions that is.

The US Dollar As The Leading International Reserve Currency

Monday, September 22nd, 2008

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euros us dollarsThe US dollar has always been the most imperative reserve currency in the world, to date at least. So significant is the US dollar bill in its trade that it is said that up to 70 percent of international currency reserves today is made out of the US dollar. This is probably the reason why the United States can afford to run higher global trade deficits and get away with it, its because of the much delayed impact this has on its economy. This “float” illusion also ultimately gives the US dollar bill enough time to recuperate, and in doing so helps to absorb some of the brunt of a financial crisis.

The reason the US dollar gained such an acclaimed reputation is due to it consistency in strength, making it a favorite amongst international traders. It was so commonly used in international trade that nations began stockpiling US currency as a indefinite form of bailout. The stash also directly helps strengthen export competitiveness within these countries, although this would also directly result in the weakening of their own respective currencies. Another advantage to stockpiling the US dollar is the fast and great inflows of capital it creates, which ultimately helps its intention in buffering against any impending financial predicaments.

This wasn’t always the case though, the US dollar did not have as much international presence as it does today early in the century, and this is why many experts say the US economy crashed back in 1929, during the great depression, because the world wasn’t as dependant on it as it is today.

Even essential commodities like gold and oil are priced in US dollar to create a more common global denominator, eliminating unhealthy trade competition, and many countries retain the currency as a means to ease trade.

The US dollar was initially established as a reserve currency principally because the US flooded the world with economical but quality manufactured goods, forcing international markets to have US dollar ready-at-hand. This is no longer the case these days, US made goods are now expensive and countries like Japan produce higher quality goods for fraction of the price.

Today, the US dollar is slowly loosing its appeal as the preferred reserve currency globally, thanks to the introduction of the Euro, arguably a much more stable currency, although continuous debates follows those who may think otherwise. Whatever it may be, I think the US dollar will preserve its status as the number one reserve currency for a long long time to come.