UN: Global Financial System at Risk if the Weakening of U.S. Dollar Continues

The United Nations (UN) warned of a crisis of confidence in the U.S. dollar should the weakening of the dollar continue and added that this would put the entire global financial system at risk.

The U.S. dollar has continued its downward trend against other major currencies in the past decade as shown in the chart below:

Click to enlarge



Source: World Economic Situation and Prospects 2011, UN

From the report:

The most recent wave of dollar devaluation has also been driven by other factors, including interest rate differentials between the United States and other economies, and growing concern about the sustainability of the public debt of the United States, half of which is held by foreigners. Measured by the exchange rate index of the dollar vis-à-vis the basket of other major currencies, the dollar has reached the lowest level since the 1970s. The depreciation of the dollar against the currencies of many emerging economies has also been significant. As a result, further (expected) losses of the book value of the vast foreign reserve holdings could trigger a crisis of confidence in the reserve currency, which would put the entire global financial system at risk.

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