The dollar has ruled supreme as the global reserve currency for over seven decades. It is the preferred means of payment, value, and reserve. As the most trusted currency on earth, it rewards Americans with lucrative privileges. While the dollar’s dominance is unlikely to last forever, a change would be difficult.
Dominant Dollar
The dollar’s source of power comes from trust and economics. We have a stable government a deep financial system. Against these benchmarks, other currencies fail. Our economic production represents 23 percent of global GDP.1 It is safer, easier, and less expensive to trade assets here than any other place on earth.
Profitable Privileges
The U.S. dollar is roughly 5 percent stronger than it would be if it were not the global reserve currency because foreign investors, corporations, and governments purchase dollars.2 This raises the value of our assets (real estate, stocks, etc.) as Americans and helps us enjoy a higher standard of living. Imported goods and overseas travel are especially more affordable. The impact of this wealth effect is estimated to be as high as 0.5 percent of GDP,2 which would be an increase of $900 billion for Americans this year.
In addition, almost 90 percent of world trading is done in dollars.3 This saves U.S. corporations money and lowers financial volatility.
The dollar’s status also increases demand for our government debt. According to Wikipedia, 63 percent of all reserves in the world are dollar-denominated debt. This demand lowers borrowing costs and saves our government an estimated half of one percent on interest.2
Greenback Drawback
In order to maintain the greenback’s place at the top, our government must borrow from and pay interest to everyone else. In addition, our strong dollar makes labor more expensive here. That is one of the reasons why jobs have been going overseas for decades.
Approximately 30 percent of S&P 500 companies get half their revenue from outside the United States. The strong dollar makes exports more expensive in foreign markets and may shave 0.4 percent from the U.S. economy this year.4
Challenging Change
Dethroning the dollar would be a process. It is not something that any group of individuals could change with a vote (Russian President Vladimir Putin has tried).
China is the world’s second largest economy. Should its yuan be considered a strong alternative? It is doubtful because the Chinese government wants a weak currency. It decided to lower the yuan’s value by 2 percent in August. This deliberate devaluation destroys trust, and no country has ever established the global currency through devaluation. This helps explain why the yuan is used in less than 3 percent of world trade while the dollar is used in 45 percent.5
Now What?
Extremely positive things are happening for the dollar and many experts are worried that the dollar may be too attractive. Between April 2014 and April 2015 the dollar appreciated 13 percent6 (a massive move for currency). Now, the Federal Reserve is conflicted over whether to raise rates because it may cause the dollar to strengthen even more.
The so called “experts” and conspiracy theorists will continue to beat their drums. No matter how logical their arguments appear, their poor predictions are meant to create fear.
Discussing the dollar’s status into the future and working hard to maintain its credibility is vital. If we do this, I believe it is safe to say that the days of the strong dollar will be with us for many, many years to come.
1. Derek Bacon, “Dominant and Dangerous,” The Economist, October 2015.
2. Richard Dobbs, David Skilling, Wayne Hu, Susan Lund, James Manyika, Charles Roxburgh, “An Exorbitant Privilege? Implications of Reserve Currencies for Competitiveness,” McKinsey & Company, December 2009.
3. Milton Ezrati, “Currencies: Yuan Wrong to Rule Them All,” Lord Abbett, November 2015.
4. Chris Matthews, “The Strong Dollar: Your Enemy or Friend?” Fortune, March 2015.
5. Fion Li, “Yuan Overtakes Yen as World’s Fourth Most-Used Payment Currency,” Bloomberg, October 2015.
6. Federal Reserve Bank of St Louis.
