Asian stock markets rise amid China stimulus hopes

HONG KONG — Asian stock markets rebounded Wednesday as hopes China would expand measures to revive its economy countered growing signs of economic decay in the US and other major countries. Shanghai's index jumped more than 6 percent.The upward move followed heavy selling over the last two days and bucked a fifth-straight day of declines on Wall Street.Chinese shares led the region's advance on speculation the country's leaders would unveil new initiatives to bolster the world's third-largest economy, its growth now sputtering, at a legislative meeting that opens Thursday. That gave a boost to other Asian markets, including Japan and Hong Kong.Also helping sentiment were figures suggesting Chinese manufacturing, while contracting again in February, did so at a slower rate than the previous month. For many investors, the news signaled that China's demand and growth may stabilize sooner than other countries' and in the process bring a quicker end to the worst global slowdown in decades.Optimism over China helped offset more economic gloom elsewhere, this time in Australia, whose economy shrank 0.5 percent in the last quarter of 2008. The contraction, which surprised economists, was the country's first in almost eight years.Despite the gains, trade was listless in some markets, and analysts were bracing for more selling that could lead Asian benchmarks to test lows reached last year at the height of the credit crisis."There are still too many uncertainties," said Peter Lai, investment manager at DBS Vickers in Hong Kong. "The news around the world is still bad and investors are still pessimistic. People are waiting for good news, but no one knows when that's coming."In Japan, the Nikkei 225 stock average was up 61.24 points, or 0.9 percent, to 7,290.96, while Hong Kong's Hang Seng added 345.18, or 2.9 percent, to 12,383.61. South Korea's Kospi climbed 3.3 percent to 1,059.26.In mainland China, Shanghai's index surged 126.68, or 6.1 percent, to 2,198.11. Analysts said reports the government may consider lowering fees collected on stock trading supplied an additional jolt.Markets in Singapore, Taiwan and New Zealand also gained. Australia's index shed 1.6 percent.Overnight in the U.S., Wall Street fluctuated throughout the day before closing down after Federal Reserve Chairman Ben Bernanke said economic recovery depends on the government's ability to stabilize weak financial markets.Investors were also depressed by new figures showing US auto sales hovered near historic lows last month.The Dow fell 37.27, or 0.6 percent, to 6,726.02, its lowest close since April 21, 1997. The index is now down more than 52 percent from its record of 14,164.53 set in October 2007.Broader stock indicators also fell. The S&P 500 index slid 4.49, or 0.6 percent, to 696.33.US futures pointed to a modestly higher open Wednesday. Dow futures rose 70, or 1.1 percent, at 6,739 and S&P500 futures gained 8.9, or 1.3 percent, to 698.40.Oil prices weakened in Asian trade, with benchmark crude for April delivery rose 4 cents to $41.69 a barrel by midday in Singapore on the New York Mercantile Exchange. The contract rose $1.50 to settle at $41.65 overnight.In currencies, the dollar was little changed at 98.47 yen compared to 98.43 yen. The euro fell to $1.2520 from $1.2531. - AP

Foreign exchange market

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3 trillion

International finance

International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade. It also studies the international projects, international investments and the international capital flows. It includes the study of futures, options and currency swaps

Reserve currency

A reserve currency (or anchor currency) is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc.This permits the issuing country to purchase the commodities at a marginally cheaper rate than other nations, which must exchange their currency with each purchase and pay a transaction cost. (For major currencies, this transaction cost is negligible with respect to the price of the commodity.) It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.

History

By some definitions reserve currencies have existed for millennia. These currencies were widely recognized and used for international transactions. However, the modern conception of an international currency as a store of value for the international reserves of central banks and governments is a relatively recent development, arising only in the 19th century coinciding with the emergence of the international gold standard in the decades leading up to the First World War.After World War II the international financial system was governed by a formal agreement, the Bretton Woods System. Under this system the US dollar was placed deliberately at the centre of the system, with the US government guaranteeing other central banks that they could sell their US dollar reserves at a fixed rate for gold if they so desired. European countries and Japan deliberately devalued their currencies against the dollar in order to boost exports and development.In the late 1960s and early 70s the system came apart under pressure from the rising prominence of the other countries, as well as growing deficits in the US. The US dollar remained central due to the lack of competitor currencies.Recently, nations, especially in Asia, have been stockpiling reserves at levels previously unknown, especially in US dollars, in an effort to strengthen export competitiveness by weakening their own currencies, and also to contain quick and large inflows of capital and buffer against financial crisis such as the Asian financial crisis

Theory

Economists debate whether or not a single reserve currency will always dominate the global economy.Many have recently argued that one currency will almost always dominate due to network externalities, especially in the field of invoicing trade and denominating foreign debt securities, meaning that there are strong incentives to conform to the choice that dominates the marketplace. The argument is that, in the absence of sufficiently large shocks, a currency that dominates the marketplace will not lose much ground to challengers.However, some economists, such as Barry Eichengreen argue that this is not as true when it comes to the denomination of official reserves because the network externalities are not strong. As long as the currency's market is sufficiently liquid, the benefits of reserve diversification are strong, as it ensures against large capital losses. The implication is that the world may well soon begin to move away from a financial system dominated uniquely by the dollar. In the first half of the 20th century multiple currencies did share the status as primary reserve currencies. Although Sterling was the largest currency, both francs and marks shared large portions of the market until the First World War, after which the mark was replaced by dollars. Since the Second World War the dollar has dominated official reserves, but this is likely a reflection of the unusual domination of the American economy during this period, as well as official discouragement of reserve status from the potential rivals, Germany and Japan

United States dollar

The United States dollar is the most important reserve currency in the world today. Throughout the last decade, an average of two thirds of the total allocated foreign exchange reserves of countries have been in U.S. dollars. For this reason, the U.S. dollar is said to have "reserve-currency status", making it somewhat easier for the United States to run higher trade deficits with greatly postponed economic impact (currency crisis). Central bank reserves held in dollar-denominated debt, however, are relatively small compared to private holdings of such debt. If foreign holders of dollar-denominated assets decided to shift holdings to assets denominated in other currencies, there could be serious consequences for the U.S. economy. Changes in the structure of the international financial system, however, typically occur only gradually. Thus, a large, sudden shift away from dollar reserve holdings is unlikely

Euro

The euro is currently the second most commonly held reserve currency, being approximately a quarter of allocated holdings. After World War II and the rebuilding of the German economy (the Wirtschaftswunder), the German Deutsche Mark gained the status of the second most important reserve currency after the US dollar. When the euro was launched in 1999, replacing the Mark and other European currencies, it inherited the status of a major reserve currency from the Mark. Since then its contribution to official reserves has risen continually as banks seek to diversify their reserves and trade in the eurozone continues to expand. The New York Times Book Review also referred to the euro as the "Deutsch-Mark by another name".Former Federal Reserve Chairman Alan Greenspan said in September 2007 that the euro could replace the U.S. dollar as the world's primary reserve currency. It is "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency."Econometrical analysis suggests, the euro may replace the U.S. dollar as the major reserve currency by 2020 if: (1) the remaining EU members, including the UK, adopt the Euro by 2020 or (2) the recent depreciation trend of the dollar persists into the future.

Pound sterling

The United Kingdom's pound sterling was the primary reserve currency of much of the world in the 18th and 19th centuries. The dire economic cost of fighting the First and Second World Wars, the increasing dominance of the USA in world economics (and, importantly, the establishment of the American Federal Reserve Bank in 1913) as well as economic weakness in the UK at various intervals during the second half of the 20th century resulted in Sterling losing its status as the world's most reserved currency.As from mid 2006 it is the third most widely held reserve currency, having seen a resurgence in popularity in recent years.Analysts say this resurgence is caused by carry-trade investors considering the pound as a stable high-yield proxy to the Euro

Other notable reserve currencies

The Japanese yen was considered as the third most important reserve currency for several decades, but has recently been on the decline and has now been overtaken by sterling.The Soviet ruble was also an important reserve currency along with the U.S. Dollar, in the Communist world, from about the 1950's up until the Soviet collapse in 1991.The Swiss franc is often said to be a reserve currency as well, due to its stability, although the share of all foreign exchange reserves held in Swiss francs is typically just around or even below 0.3%.Other nations and groups of nations have expressed their desire to see their currencies (or future currencies) be used as reserve currencies, such as Russia, and the Gulf Cooperation Council.The G8 also frequently issues public statements as to exchange rates, though with the exception of Japan, the member states are impotent in their ability to directly affect rates. In the past, however, its predecessor bodies could directly manipulate rates to reverse large trade deficits (Plaza Accord).The top reserve currency is generally selected by the banking community for the strength and stability of the economy in which it is used. Thus, as a currency becomes less stable, or its economy becomes relatively less dominant, bankers may over time abandon it for a currency issued by a larger or more stable economy. This can take a relatively long time, as recognition is important in determining a reserve currency. For example, it took many years after the United States overtook the UK as the world's largest economy before the dollar overtook Sterling as the dominant global reserve currency.

Spanish dollar

The Spanish dollar (also known as the piece of eight, the real de a ocho, or the eight real coin) is a silver coin, worth eight reales, that was minted in the Spanish Empire after a Spanish currency reform in 1497. It was legal tender in the United States until an Act of the United States Congress discontinued the practice in 1857. Through widespread use in Europe, the Americas and the Far East, it became the first world currency by the late 18th century. Many existing currencies, such as the Canadian dollar, United States dollar and the Chinese yuan, as well as currencies in Latin America and the Philippines peso were initially based on the Spanish dollar and other 8 reales coins.The term peso was used in Spanish to refer to this denomination and it became the basis for many of the currencies in the former Spanish colonies, including the Argentine, Chilean, Colombian, Costa Rican Cuban, Dominican, Ecuadorian, Guatemalan, Honduran, Mexican, Nicaraguan, Paraguayan, Philippine, Puerto Rican, Salvadoran, Uruguayan and Venezuelan pesos

Spain

Following the introduction of the Guldengroschen in Austria in 1486, the concept of a large silver coin with high purity (sometimes known as "specie" coinage) eventually spread throughout the rest of Europe. Monetary reform in Spain brought about the introduction of an 8 reales coin in 1497.The coin was minted with several different designs in the following centuries at various mints in Spain through to the 19th century, having gained wide acceptance beyond Spain's borders. In the 19th century, the coin's denomination was changed to 20 reales (based on 20 reales de vellon) and finally 2 escudos.Spain's adoption of the peseta and joining the Latin Monetary Union meant the effective end for the last vestiges of the Spanish dollar in Spain itself. However, the 5 pesetas coin was slightly smaller and lighter but was also of high purity (90%) silver.In the 1990s, commemorative 2000 pesetas coins were minted, similar in size and weight to the 8 reales and also with high finesse.

Mexico

Following independence in 1821, Mexican coinage of silver reales and gold escudos followed that of Spanish lines until decimalisation and the introduction of the peso. The Mexican 8 reales coin (eventually becoming a 1 peso coin) continued to be a popular international trading coin throughout the 19th century.After 1918, the Peso was reduced in size and finesse with further reductions in the 1940s and 1950s. However, 2 (1921), 5 (1947) and 10 (1955) peso coins were minted in the same period, similar in size and finesse to the old peso

United States

The Coinage Act of 1792 created the United States Mint, but the first U.S. dollars were not as popular as the Spanish dollars, which were heavier and were made of finer silver. An eight real coin nominally weighed 550.209 Spanish grains, which is 423.900 troy/avoirdupois grains (0.883125 troy ounce or 27.468 grams), .93055 fine: so contained 0.821791 troy ounce (25.560 grams) fine silver. Its weight and purity varied significantly between mints and over the centuries. In contrast, the Coinage Act of 1792 specified that the U.S. dollar would contain 371 4/16 grain (24.1 g) pure or 416 grain (27.0 g) standard silver.The coins had a nominal value of eight reales ("royals"). The coins were often physically cut into eight "bits", or sometimes four quarters, to make smaller change. This is the origin of the colloquial name pieces of eight for the coin, and of "quarter" and "two bits" for twenty-five cents in the United States.Prior to the American Revolution there was, due to British mercantilist policies, a chronic shortage of British currency in its colonies. Trade was often conducted using Spanish dollars. Spanish coinage was legal tender in the United States until an Act of Congress discontinued the practice in 1857. The pricing of equities on U.S. stock exchanges in 1/8 dollar denominations persisted until the New York Stock Exchange converted to pricing in sixteenths of a dollar on June 24, 1997, to be followed shortly after by decimal pricing.Long tied to the lore of piracy, "pieces of eight" were manufactured in the Americas and transported in bulk back to Spain (to pay for wars and various other things), making them a very tempting target for seagoing pirates. Some pirates were among the richest people in the world. The Manila Galleon transported Mexican silver to Manila in Spanish Philippines, where it would be exchanged for Philippine and Chinese goods, since silver was the only foreign commodity China would take. In oriental trade, Spanish dollars were often stamped with Chinese characters known as "chop marks" which indicate that particular coin had been assayed by a well-known merchant and determined genuine.Thanks to the vast silver deposits that were found in Mexico (for example, at Taxco and Zacatecas) and Potosí in modern-day Bolivia, and to silver from Spain's possessions throughout the Americas, mints in Mexico and Peru also began to strike the coin.Millions of Spanish dollars were minted over the course of several centuries. They were among the most widely circulating coins of the colonial period in the Americas, and were still in use in North America and in South-East Asia in the 19th century. They had a value of one dollar when circulating in the United States.The coin is roughly equivalent to the silver thaler issued in Bohemia and elsewhere since 1517. The German name "thaler" (pronounced "tah-ler" — and "dahler" in Low German) became dollar in French and English.

Islamic banking

Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). In the late 20th century, a number of Islamic banks were created, to cater to this particular banking market.

Modern Islamic banking

The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image—for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country.

Basic Features And Conditions Of Salam

First of all, it is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of effecting the sale. It is necessary because in the absence of full payment by the buyer, it will be tantamount to sale of a debt against a debt, which is prohibited, as the basic wisdom behind the permissibility of salam is to fulfill the instant needs of the seller. If the price is not paid to him in full, the basic purpose of the transaction will be defeated. Therefore, all the Muslim jurists are unanimous on the point that full payment of the price is necessary in Salam. However, Imam Malik is of the view that the seller may give a concession of two or three days to the buyers, but this concession should not form part of the agreement.Salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of salam, because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible.Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain.It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned.It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa.The exact date and place of delivery must be specified in the contract.Salam cannot be effected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari‘ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed

Islamic laws on trading

The Qur'an prohibits gambling (games of chance involving money). The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean "risk").The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are The Qur'an prohibits gambling (games of chance involving money). The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean "risk").The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are hidden." The Shafi legal school defined gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities, with the less desirable one being more likely." The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what he bought, or the seller does not know what he sold.” The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that "Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature that makes the trade similar to gambling." There are a number of hadith who forbid trading in gharar, often giving specific examples of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother’s womb etc.). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram. [5]What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was mainly due to the complication of having to decide what is and is not a minor risk. Derivatives instruments (such as stock options) have only become common relatively recently. Some Islamic banks do provide brokerage services for stock trading and perhaps even for derivatives tradinghidden." The Shafi legal school defined gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities, with the less desirable one being more likely." The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what he bought, or the seller does not know what he sold.” The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that "Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature that makes the trade similar to gambling." There are a number of hadith who forbid trading in gharar, often giving specific examples of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother’s womb etc.). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram.What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was mainly due to the complication of having to decide what is and is not a minor risk. Derivatives instruments (such as stock options) have only become common relatively recently. Some Islamic banks do provide brokerage services for stock trading and perhaps even for derivatives trading

Optimum currency area

In economics, an optimum currency area (OCA), also known as an optimal currency region (OCR), is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a new currency. The theory is used often to argue whether or not a certain region is ready to become a monetary union, one of the final stages in economic integration.An optimal currency area may often be larger than a country. For instance, part of the rationale behind the creation of the euro is that the individual countries of Europe do not each form an optimal currency area, but that Europe as a whole does form an optimal currency area.In theory, an optimal currency area could also be smaller than a country. Some economists have argued that the United States, for example, really consists of two optimal currency areas and that the United States should have two currencies, one for the western half and one for the eastern half.The theory of the optimal currency area was pioneered by economist Robert Mundell.Credit often goes to Mundell as the originator of the idea, but others point to earlier work done in the area by Abba Lerner

OCA with stationary expectations

Published by Mundell in 1961, this is the most cited by economists. Here asymmetric shocks are considered to undermine the real economy, so if they are too important and cannot be controlled, a regime with floating rates is considered better, because the global monetary policy (interest rates) will not be fine tuned for the particular situation of each constituent region.The four principal criteria for a successful currency union are:Labor mobility across the region. This includes physical ability to travel (visas, workers' rights, etc.), lack of cultural barriers to free movement (such as different languages) and institutional arrangements (such as the ability to have superannuation transferred throughout the region) (Robert A. Mundell). In the case of the Eurozone, while capital is quite mobile, labour mobility is relatively low, especially when compared to the U.S. and Japan.Product diversification: The Eurozone scores quite well on this criterion, and monetary integration seems to further improve the diversification of production structures.Openness with capital mobility and price and wage flexibility across the region. This is so that the market forces of supply and demand automatically distribute money and goods to where they are needed. In practice this does not work perfectly as there is no true wage flexibility. (Ronald McKinnon). The Eurozone members trade heavily with each other (intra-European trade is greater than international trade), and most recent empirical analyses of the 'euro effect' suggest that the single currency has increased trade by 5 to 15 percent in the euro-zone when compared to trade between non-euro countries.

OCA with international risk sharing

Supposing that the currency is managed properly, the larger the area, the better. In contrast with the previous model, asymmetric shocks are not considered to undermine the common currency because of the existence of the common currency. This spreads the shocks in the area because all regions share claims on each other in the same currency and can use them for dumping the shock, while in a flexible exchange rate regime, the cost will be concentrated on the individual regions, since the devaluation will reduce its buying power. So despite a less fine tuned monetary policy the real economy should do better.A harvest failure, strikes, or war, in one of the countries causes a loss of real income, but the use of a common currency (or foreign exchange reserves) allows the country to run down its currency holdings and cushion the impact of the loss, drawing on the resources of the other country until the cost of the adjustment has been efficiently spread over the future. If, on the other hand, the two countries use separate monies with flexible exchange rates, the whole loss has to be borne alone; the common currency cannot serve as a shock absorber for the nation as a whole except insofar as the dumping of inconvertible currencies on foreign markets attracts a speculative capital inflow in favor of the depreciating currency. (Robert A. Mundell is found in both sides of the debate about the euro. Most economists cite preferentially the first (stationary expectations) and conclude against the euro, yet Mundell advocates this one, and concludes in favour of the euro.Rather than moving toward more flexibility in exchange rates within Europe the economic arguments suggest less flexibility and a closer integration of capital markets. These economic arguments are supported by social arguments as well. On every occasion when a social disturbance leads to the threat of a strike, and the strike to an increase in wages unjustified by increases in productivity and thence to devaluation, the national currency becomes threatened. Long-run costs for the nation as a whole are bartered away by governments for what they presume to be short-run political benefits. If instead, the European currencies were bound together disturbances in the country would be cushioned, with the shock weakened by capital movements.

Hypothetical single "true" global currency

An alternative definition of a world or global currency refers to a hypothetical single global currency, as the proposed Terra, produced and supported by a central bank which is used for all transactions around the world, regardless of the nationality of the entities (individuals, corporations, governments, or other organisations) involved in the transaction. No such official currency currently exists for a variety of reasons, political, economic, and cultural.There are many different variations of the idea, including a possibility that it would be administered by a global central bank or that it would be on the gold standard .Supporters often point to the euro as an example of a supranational currency successfully implemented by a union of nations with disparate languages, cultures, and economies. Alternatively, digital gold currency can be viewed as an example of how global currency can be implemented without achieving national government consensus.A limited alternative would be a world reserve currency issued by the International Monetary Fund, as an evolution of the existing Special Drawing Rights and used as reserve assets by all national and regional central banks

The euro and the United States dollar

Since the mid-20th century, the de facto world currency has been the United States dollar. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principal reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves" (255).Many of the world's currencies are pegged against the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and eliminated their own currency in favor of the United States dollar. The dollar continues to dominate global currency reserves, with 64.6% held in dollars, as compared to 25.8% held in euros (Reserve Currency).Since 1999, the dollar's dominance has begun to be undermined by the euro, that represents a larger size economy, with the prospect of more countries adopting the euro as their national currency. The euro inherited the status of a major reserve currency from the German Mark (DM), and since then its contribution to official reserves has risen continually as banks seek to diversify their reserves and trade in the eurozone continues to expand.Similar to the dollar, quite a few of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Estonian kroon and the Bulgarian lev, plus several west African currencies like the Cape Verdean escudo and the CFA franc. Other European countries, while not being EU members, have adopted the euro due to currency unions with member states, or by unilaterally superseding their own currencies: Andorra, Kosovo, Monaco, Montenegro, San Marino, and the Vatican City.As of December 2006, the euro surpassed the dollar in the combined value of cash in circulation. The value of euro notes in circulation has risen to more than €610 billion, equivalent to US$800 billion at the exchange rates at the time.This results in the Euro being the currency with the highest combined value of cash in circulation in the world.

History/Spanish Dollar: 17th-19th centuries

In the 17th and 18th century, the use of silver Spanish dollars or "pieces of eight" spread from the Spanish territories in the Americas eastwards to Asia and westwards to Europe forming the first ever worldwide currency. Spain's political supremacy on the world stage, the importance of Spanish commercial routes across the Atlantic and the Pacific, as well as the coin's quality and purity of silver, made it become internationally accepted for over two centuries. It was legal tender in Spain's Pacific territories of Philippines, Micronesia, Guam and the Caroline Islands and later in China and other Southeast Asian countries until the mid 19th century. In the Americas it was legal tender in all of South and Central America (except Brazil) as well as in the U.S. and Canada until the mid-19th century. In Europe the Spanish dollar was legal tender in the Iberian Peninsula, in most of Italy including: Milan, the Kingdom of Naples, Sicily and Sardinia, as well as in the Franche-Comté (France), and in the Spanish Netherlands. It was also used in other European states including the Austrian Hapsburg territories

19th - 20th centuries

Prior to and during most of the 1800s international trade was denominated in terms of currencies that represented weights of gold. Most national currencies at the time were in essence merely different ways of measuring gold weights (much as the yard and the metre both measure length and are related by a constant conversion factor). Hence some assert that gold was the world's first global currency. The emerging collapse of the international gold standard around the time of World War I had significant implications for global trade.In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged against the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar a global currency.Since the collapse of the fixed exchange rate regime and the gold standard and the institution of floating exchange rates following the Smithsonian Agreement in 1971, currencies around the world have no longer been pegged against the United States dollar. However, as the United States remained the world's preeminent economic superpower, most international transactions continued to be conducted with the United States dollar, it has remained the de facto world currency.Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, for a while, the Japanese yen became increasingly used as an international currency, but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has competed with the United States dollar in usage in international finance.

Arguments for a global currency

Some of the benefits cited by advocates of a global currency are that it would:Eliminate speculation in Forex since there is a need for a currency pair to speculate.Eliminate the direct and indirect transaction costs of trading from one currency to another .Eliminate the balance of payments/current account problems of all countries.Eliminate the risk of currency failure and currency risk.Eliminate the uncertainty of changes in value due to exchange-caused fluctuations in currency value and the costs of hedging to protect against such fluctuations.Cause an increase in the value of assets for those countries currently afflicted with significant country risk.Eliminate the misalignment of currencies.Utilize the seigniorage benefit and control of printing money for the operations of the global central bank and for public benefit.Eliminate the need for countries or monetary unions to maintain international reserves of other currencies.

Arguments against a single global currency

Some economists argue that a single global currency is unworkable given the vastly different national political and economic systems in existence.

Loss of national monetary policy

With one currency, there can only be one interest rate. This results in rendering each present currency area unable to choose the interest rate which suits its economy best. If, for example, the European Union were to have an economic boom while the United States slumped into a depression, this period would be eased if each could choose the interest rate which best fitted its needs (in this case, a relatively high interest rate in the former, and a relatively low one in the latter).

Political difficulties

In the present world, nations are not yet able to work together closely enough to be able to produce and support a common currency. There has to be a high level of trust between different countries before a true world currency could be created. A world currency might even undermine national sovereignty of smaller states.A currency needs an interest rate, while one of the largest religions in the world, Islam, is against the idea of interest rate. This might prove to be an unsolvable problem for a world currency, if religious views concerning interest do not moderate. This is not necessarily a fatal falw however, as a large number of religious adherents who oppose the paying of interest are able to take advantage of banking facilities in their countries which are able to cater to this. An example of this might be Islamic banking, which operates well enough in nations where the central bank sets interest rates for most other transactions.Having an interest rate is one of the fundamental laws of a market economy. Depositing of money is important because it lets the money be lent out where it is needed most, for instance when establishing a new company or buying a house for a family. In order to get strangers to lend each other money the creditors needs to get compensated for their risk taken and their good will. If not they would just spend the money, or keep it or invest it somewhere else. If you want to be without interest rate you need other ways to compensate depositors, and the compensation would have to be in the form of money, in other words an interest-look-alike

Economical difficulties

Some economists argue that a single world currency is unnecessary, because the U.S. dollar already provides many of the benefits of a world currency while avoiding some of the costs .If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency.A world currency would not allow for adjustments by national central banks to accommodate local economic problems. A single currency can only have a single interest rate. However, different regions in the world, with varying rates of economic growth, may require different interest rates

Open market operations in the United States

The Federal Reserve (often referred to as 'The Fed') implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds. Federal funds are the reserves held by banks at the Fed.
Open market operations are one tool within monetary policy implemented by the Federal Reserve to steer short-term interest rates. Using the power to buy and sell treasury securities, the Open Market Desk at the Federal Reserve Bank of New York can supply the market with dollars by purchasing T-notes, hence increasing the nation's money supply. By increasing the money supply or Aggregate Supply of Funding (ASF), interest rates will fall due to the excess of dollars banks will end up with in their reserves. Excess reserves may be lent in the Fed funds market to other banks, thus driving down rates.

Interest rates and credit risk

It is increasingly recognized that the business cycle, interest rates and credit risk are tightly interrelated. The Jarrow-Turnbull model was the first model of credit risk which explicitly had random interest rates at its core. Lando (2004), Darrell Duffie and Singleton (2003), and van Deventer and Imai (2003) discuss interest rates when the issuer of the interest-bearing instrument can default.

Money and inflation

Loans, bonds, and shares have some of the characteristics of money and are included in the broad money supply.
By setting i*n, the government institution can affect the markets to alter the total of loans, bonds and shares issued. Generally speaking, a higher real interest rate reduces the broad money supply.
Through the quantity theory of money, increases in the money supply lead to inflation. This means that interest rates can affect inflation in the future.