Is the US dollar under threat as an international currency? Economist Linda Goldberg, from the Federal Reserve Bank of New York, has the answer.
Is the dollar still the dominant international currency? This column argues that the answer is “yes”. The dollar is used as a major form of cash currency, and is the main currency for exchange rate pegs and for invoicing foreign transactions. Network externalities create inertia – everyone uses the dollar because everyone else is using the dollar.
Linda Goldberg, “What is the status of the international roles of the dollar?”, VoxEU, 31 March 2010.
This short essay – with 2 tables and 2 charts – provides a wealth of useful facts and information. I learned that more than two-thirds of dollar banknotes are estimated to be held outside the US, a proportion that has been roughly constant, at least since 1990. The proportion of hundred-dollar notes held abroad actually increased steadily, from 65% in 1990 to more than 70% in 2007. That is a lot of bank notes stuffed into mattresses, a lot of interest-free loans to the US central bank!
Ms Goldberg provides percentages, but no figures on the actual value of dollars in circulation outside the US. From another source – a report to Congress by the Secretary of the Treasury – I discovered that foreign holdings of US banknotes were thought to be somewhere in the neighbourhood of 450 billion as of 2005. This is not an insignificant sum. For reference, foreign holdings of all US Treasury securities were roughly $2,000 billion at that time.
Ms Goldberg warns that past performance of the US dollar should not be used to predict future performance. Transitions are possible. The pound sterling, for example, “was the dominant reserve currency in the first half of the twentieth century until it was overtaken by the dollar”.
Tags: exchange rates
Measuring the share of domestic currency held abroad is surprisingly difficult, as this late-eighties Fed paper shows: http://www.federalreserve.gov/paymentsystems/files/coin_1096lead.pdf
However… there’s a useful first-year macro result that net capital outflow, savings minus investment, net exports and the stock of domestic currency held by foreigners are all equal to each other.
There are a lot of caveats, of course, but the basic result holds. Going by that measure, foreign holdings of U.S. dollars dropped precipitously recently, despite the massive increase in the monetary base. There’s been a nominal (and probably real) rebound in the last year or so, but S – I is still smaller than it was in, say, 2005, before the money-printing and acute crisis began, so I suspect foreign holdings of U.S. currency as a % of stock have fallen.
The U.S. dollar is still the world’s reserve currency – I’m not sure anyone seriously doubts that. The big question is, for how much longer? A year? A decade? A century?