At a time when many of us prepare to celebrate U.S. independence, it’s nice to take a step back from our coverage of foreign currency events to assess the role of the U.S. dollar around the globe.
As far as usage is concerned, the dominance of the greenback, issued 20 years after the signing of the Declaration of Independence, remains unchallenged. The U.S. dollar was on one side of 87 percent of all global currency transactions, according to the most recent survey by the Bank of International Settlements.
Another measure of acceptance of our American currency can be seen in the amount of U.S. dollar reserves around the world. These reserves are assets owned by governments, but held in currencies other than their own local currency. Of all allocated global reserves, the U.S. dollar comprises about 63 percent, with the euro coming in a distant second, at 22 percent. This is down from just over 70 percent at the beginning of this century (about the same time that the euro had just been introduced).
Reserve currency status does come with certain benefits. Most important, the U.S. can pay its external debts at very low costs. In the case of Treasury bonds – popular among reserve managers – because the U.S. dollar is a fiat currency (declared legal tender and not backed by metal) we can also print more if we need to.
We have heard more talk recently about the U.S. dollar losing some of its reserve currency status – or at least having more serious rivals. The euro is one of those currencies expected to gain in reserve prominence, but it’s no secret that China wants its renminbi to be considered the reserve currency from Asia, replacing the relatively small but significant holdings that some nations hold in Japanese yen.
My View: The U.S. dollar still has a dominant position in foreign exchange and will not lose reserve currency status anytime soon. The reason is not so much blind loyalty to the U.S. dollar, or doubt about the quality of other currencies. Rather, switching reserve currencies comes at a real cost. Any country that starts selling U.S. dollar positions to buy another currency will put downward pressure on the value of their own reserve assets and cheapen the dollar. This tends to help U.S. exporters while hurting that country’s own export sector.
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