The value of the dollar has witnessed a nosedive in recent weeks and months. As a result, the international price of crude oil – which is a dollar-denominated commodity – has shattered all past records and has now, at least, once reached near the $112 a barrel mark.

Countries heavily dependent on imported oil are in a tight situation. Some countries, which hold massive foreign exchange reserves in dollars are faced with a dilemma as to whether they should diversify their reserves, substantially reducing the dollar component and replacing it with another currency like euro.

What is even more perturbing is that a growing number of commodity investors and currency traders has expressed the apprehension that the dollar is in danger of losing its place as an international currency and that its days may be numbered. Their fears are reinforced on reports indicating that the United States may be hit by the worst ever recession after the second world war.

The matter has been analysed in the reports appearing in the US press recently and an effort has been made in these reports to show, with the help of latest statistics, that the dollar does not face any immediate threat to its supremacy, despite its declining value. However cold statistics and living reality are two different things.

According to these reports, dollar remains the medium of exchange in every thing from sugar to wheat to oil and the world is simply not prepared right now to adopt another currency in place of dollar. Doing so would require a complex reworking of the global financial system and few nations would be ready to undertake such an uphill task, at the moment.

It may be recalled that the dollar’s ascendancy started after Europe was weakened by World War II. Until then, the British pound reigned accounted for about two-thirds of the foreign exchange reserves held by the world’s central banks, although the US had gained the position of the world’s largest economy at the start of the 20th century.

Even long after the World War II, a number of commodities were still traded in pound. The London sugar market did not abandoned pound sterling for a dollar-denominated trading contract until 1980.

During the last 5-6 decades, the dollar has gradually established itself as the world’s dominant currency. It is a medium of exchange, a measure, a standard for deferred payments but no longer a store of value.

The dollar still enjoys the number one position as a reserve currency despite its massive depreciation against the euro. According to the IMF, the dollar’s share in the world’s central banks’ reserves stood at 72 per cent in early 2002 but came down to 64 per cent by September 2007. The share of euro in these reserves went up to 25 from 18 per cent in 1999, when the currency was introduced.

Central banks the world over, find it difficult to reduce the share of dollar in the reserves held by them. Since the majority of the countries export so much to the US, there is a regular flow of dollars into the coffers of their central banks. This flow can be checked only if these countries stop exporting to the US.

Besides, if the central banks sell a part of their dollar reserves, it would further weaken the dollar’s value. That would not be in their interest, since it would push down the value of their remaining dollar reserves.

As in case of foreign exchange reserves held by world’s central banks, dollar is also the leader in the world’s currency transactions. It reportedly has a 86 per cent share in the daily currency transactions of some $3.2 trillion around the world, according to the Bank of International Settlements. The role of dollar is often as a middle step in exchanges between two other currencies. The share of dollar in the international currency transactions was as much as 90 per cent in 2001, which came down to 86 per cent over the last few years.

Similar to its leading role in the central banks’ foreign exchange reserves and international currency transactions, dollar is also deeply linked to the international trade. According to the European Central Bank, 80 per cent of the exports from Indonesia, Thailand and Pakistan are invoiced in dollars, although less than a quarter of these exports land in the US.

Brazil presently accounts for about 40 per cent of the world sugar exports and almost none of it goes to the US, but the sugar trade still takes place in dollars, because the global commodities markets quote their prices in dollars.

In Malaysia, the stock and derivatives exchange is reportedly going to launch a new international palm oil futures contract next month. Malaysia and Indonesia are world’s leading producers of palm oil, together accounting for 87 per cent of global production. China is the world’s largest importer of palm oil, while the US share in the total imports is less than three per cent. Still, it has been decided that the new contract will be traded in dollars, since the global trade is being currently conducted in that currency.

The headquarters of a 33-year old organisation called the Asian Clearing Union happens to be in Iran. The union acts as a clearing house for cross-border transactions among eight countries, including Iran, Pakistan, India and Bangladesh. Here also, the currency used to account for the trades is dollar. The group is reportedly considering whether to add euro as another currency for its transactions. However, dollar will remain the major currency.

According to these reports, some of the US geopolitical rivals were trying to break away from dollar. Russia is reportedly setting up a commodity exchange where future contracts for oil and other products would be denominated in rubles, instead of US dollar. Iran is reported to have lauded the Russian plan, saying that it is an effort to liberate the world economy from the ‘dollar’s slavery’. But the move to abandon dollar in favour of another currency had reportedly not gone very far. These are visible signs of initial efforts to come out of the dollar orbit.

There had been speculations recently that due to persistent decline in the value of dollar, Opec as considering to price its oil in another currency.

According to reports, experts had examined these speculations and they have expressed the view that oil prices are based around three types of crude oil, that is, West Texas Intermediate, Brent crude and Dubai crude. Since all these are denominated in dollars, any plan to change the currency is likely to pose a number of challenges.

The US is still the world’s largest economy and serves as a major market for the rest of the world. The EU, Japan, the East Asian economies and even China may not escape the impact of the deep recession in the United States. What is at stake is their exports to America and also the process of accumulation of central banks reserves in dollar.

There are no immediate solutions in sight to the problems facing the US economy. The key issue is whether the value of dollar can be prevented from falling further, at a time when the greenback has depreciated to 95-96 yen and 1.59 to a euro and the US Fed interest rates are falling sharply.

If the slide in the dollar continues, the share of the greenback in the reserves held by central banks may decline further. At the same time, the dollar may receive a setback as medium of exchange and some countries may step up their efforts to price their commodities in a more stable currency.