Mostly Economics

Federal Reserve Governor Christopher J. Waller in this speech discusses whether USD’s international role is diminishing:

My subject is the U.S. dollar’s primacy in global finance and the global economy, which some feel is under threat as never before. One headline asserts: “Why the Dollar’s Reign Is Near an End.” Actually, it turns out this threat isn’t so new. That headline was from 2011.² It is tempting to write off concerns about the dollar’s status that never seem to come to pass, but I don’t dismiss them. The role of the United States in the world economy is changing, finance is always changing, and I think it is important for policymakers to regularly consider if and why the dollar’s role might change as well. That’s what I aim to do in these remarks.

When people refer to the dollar and its reserve currency status, they typically mix together a variety of roles that it plays on the world stage. So I would like to start by clarifying these many roles. First, the term “dollar” often refers to physical U.S. currency and its use around the world. However, in certain contexts, it is used to describe financial assets, such as U.S. Treasury securities, that are denominated in and promise redemption in U.S. dollars. Finally, the word “dollar” is used to describe its use as the settlement unit of account in international transactions. I will use the word “dollar” throughout this speech to refer to these various concepts, and I hope it will be clear which one I am referring to as I speak.

For many decades, the U.S. dollar has had an outsized role in the global economy, supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and strong property rights and rule of law. The dollar’s international role has clear benefits for the United States, lowering transaction and borrowing costs for U.S. households, businesses, and government and widening the pool of creditors and investors. The widespread use of the dollar can help insulate the U.S. economy from shocks from abroad.

The rest of the world also benefits from the dollar’s international role. The dollar serves as a safe, stable, and dependable form of money around the world. It serves as a reliable common denominator for global trade and a dependable settlement instrument for cross-border payments. In doing so, it reduces costs of engaging in international transactions for households and businesses including those outside of the United States.

Recent commentary warning of a possible decline in the status of the U.S. dollar raises concerns about the effects of sanctions against Russia, U.S. political dysfunction, the rise of digital assets, and China’s efforts to bolster usage of the renminbi. Other commentary has warned of “geoeconomic fragmentation” and whether trade and financial flows could realign in ways that adversely affect the dollar’s outsized role. Against this backdrop, it’s useful to review whether there has been any change in how the dollar stacks up against the standard measures by which we assess a currency’s acceptance as an international currency.

Acceptance as an “international currency” is typically assessed along three dimensions: its use as a store of value, as a medium of exchange, and as a unit of account. Alarmist headlines notwithstanding, the dollar continues to dominate in all three of these measures, and generally by a large margin compared with any other currency.³