Dollar's reign as a reserve currency at risk.

Dollar has been the currency of choice for international trade and reserve currency of choice for several decades but now it seems to be at risk. Dollar has been on the slide and has hit record lows against Pound, yen and swiss frank. It is trading at an all time low against Euro since it was launched in 1997.

First let us look into the reasons for the downfall.
1. US economy is below its average growth rate with many economists saying the economy is already in a recession.
2. The subprime crises has severly damaged the US financial system with many of the US as well as other banks reporting substantial writedowns on their US portflolios.
3. The low interest rate compared to eurozone and other emerging economies detters financial investment.
4. The emergence of Euro as an alternative.

Many emerging markets bought dollars in large quantities to keep their currenies undervalued to boost their exports , but increasing commodity and food prices have led many to question the strategy. Total reserves now touch $4.9 trillion, most of this held in US $. Many Asian economies have been hamstrung by China's exchange rate policy of not letiing its currency appreciate sharply. China's problem reflets its concern about export growth and its $1.4 trillion reserves. Some of the middle east economies are considering abandoning their peg to dollar as this might import inflation(higher domestic price of imported goods)

Why should the US be concerned about the prominance of its currency in world financial markets. Theres an old saying 'Its our currency and ur problem'. The US derives substantial benefit from its currency - Seigniorage (the net revenue derived from the issuing of currency). some of them are.
1. Can raise large amounts of debt at low interest rates. remember vietnam, afghanistan and iraq wars which were financed by reunning printing presses.
2. Fecilititates easy international trade.

Just by being the largest economy in the world will not help the US to shore up its currency. It took a long time for the dollar to dethrone Pound even after the US becoming the largest economy in the world. The US should shore up its financial system and bring in more changes to bring the economy back to its long term growth rate.

The durability of the dollar's reserve-currency status owes more to the absence of a challenger than sound U.S. policies. The euro is hobbled by the lack of a single, pan-European capital market and its being a hybrid currency used by a mix of countries yet owned by none.
China's yuan is a potential contender, but not until that currency becomes fully convertible, the nation's financial markets more developed and internationally recognized laws more established -- which is years away. Japan, meanwhile, has always resisted the yen being a reserve currency.