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U.S. dollar faces threats to its reign

War spending, trade deficits, and devaluation against foreign currencies weigh on the greenback.

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The United States dollar has been the king currency in the world for decades. Could it now lose its throne?

It's "definitely a possibility," says Barry Eichengreen, an economist at the University of California, Berkeley.

The US has been spending hundreds of billions on the Iraq war, suffered massive trade deficits for many years ($708 billion in 2007), and now is paying about $1.2 billion a day for imported oil. Moreover, the dollar has been hugely devalued against the euro (the currency of 15 nations in the European Union), the British pound, and some other currencies.

Conventional wisdom among economists is that currency ascendancy gives a nation an economic advantage. The US, for instance, finances much of its international payments deficit by issuing Treasury bonds and other debt instruments denominated in dollars. So when the dollar loses value, as it has on foreign-exchange markets, the debts are paid in those same cheaper dollars.

Other nations cannot finance an international payments deficit in their own currency. So they can be more easily pressured by external forces to take unpopular domestic policy measures to restore an external balance. Those forces may include the International Monetary Fund (IMF) or a group of wealthy nations demanding repayment on loans.


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