Currency Management Essay Example | Topics and Well Written Essays - 250 words

Currency Management - Essay Example The foreign currency in the dollarization context serves as a medium of exchange, unit of account, and store of value (Honohan, 2007). Dollarization operates and functions within the geographical boundaries of the specific country that adopts it. Different countries can engage in dollarization and use the same foreign currency, but their decisions are independent and unrelated. On the other hand, monetary union defines a scenario where two or more countries come together and agree to share a common currency. This means that all countries bound to the union uses the agreed upon currency to carry out economic transactions. Dollarization and monetary unions exhibit both advantages and disadvantages. For a small country, dollarization may be used to enhance the economic performance. However, the success of dollarization in the country that adopts the foreign currency may result in disregarded domestic currency by having the foreign currency replace it. In the context of the global financial system, the strongest and most used foreign currency may dominate and outperform other currencies through overvaluation. The policy is, however, vital in nurturing economic relationships across the globe. On the other hand, monetary union improves the value of the chosen currency, making the countries bound to the union influential in terms of domestic and international economic transactions (Gerber, 2010). However, countries with poor economic performance can be dominated and â€Å"enslaved† by stronger countries in the