It¡¯s been called the ¡°exorbitant privilege¡°; it might also be termed ¡°the indestructible curse.¡± Americans are proud of the fact that the dollar ¡ª their money ¡ª is also the world¡¯s dominant international currency. But this very same global role also helps explain some of Americans¡¯ major complaints about the world economy: why we constantly run sizable trade deficits; and why U.S. manufacturers often are at a price disadvantage with foreign competitors.
It¡¯s not that other currencies (mainly the euro and yen) don¡¯t play a global role. They¡¯re also used to pay for imports and for cross-border borrowing and lending. The dollar simply overshadows them. Dollars constitute 63 percent of countries¡¯ foreign exchange reserves, almost triple the next closest currency, the euro (22 percent), says the International Monetary Fund.
Partly, the dollar¡¯s role reflects inertia. After World War II, with much of Europe and Asia in ruins, the U.S. currency dominated by default. Later, the dollar benefited from America¡¯s wealth and legal system. The United States is regarded as a safe haven, says economist Eswar Prasad in his book ¡°The Dollar Trap.¡± Foreigners can invest their dollars in the world¡¯s deepest stock and bond markets. And ¡°the rule of law is firmly established. ... Foreign investors [know] they will be treated fairly if they invest in the U.S.,¡± he writes.
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