the dollar's emergence as the world's main currency is driving two of the defining trends in the world economy today.
1. this is unambiguously positive. the dollar's universal acceptance has been an essential force behind the world's powerful economic expansion. this has swollen the ranks of the middle class and lifted many others from poverty. but the flip side has been a cause for concern: enduring demand for the dollar has also encouraged the us to run up enormous, some would say unsustainable, foreign debts and record trade deficits. the US now pays out the equivalent of $1mn each days for every man/woman/child in the country -- just in interest payments on that foreign debt. Washington's ability assuage international borrowers who are becoming increasingly fearful that these debts and deficits are running out of control may well determine how long the dollar can continue to enjoy its special status!
2. to understand why the dollar will have such far-reaching global effects, it helps to appreciate how almighty the buck really is. even by the standards of the economic and military superpower, the dollar's supremacy has been remarkable. while the us economy accounts for 30% of global GDP and american companies compose nearly 50% of the world's stock market cap, the dollar's dominance is greater still. it figures in nearly 90% of all trades in the more than $3.2tn a day FX market. nearly 2/3rds of the world's central bank reserves are held in dollars. the dollar is truly the world's currency in that of the $760bn in circulation, about two-thirds are held abroad.
no other currency may unseat the dollar from its mountain-top, but the euro and yuan are chipping away its dominance. many central banks have diversified their reserves to include more euros. Washington can slow this transition by cutting deficits and encouraging private savings -- helping in a dollar rally and raise its value.
the financial crises of 1997 and 98 also marked a shift. following the depletion of their dollar reserves, most Asian and Latin American countries stopped pegging their currencies to the dollar and rather let them freely float. as governments also whipped up their economies into shape, paying down their debt and building up their reserves, they found that they could borrow money through the international markets in their own currencies. global investors no longer insisted that bond transactions be in dollars.
the growing sophistication of the financial systems could diminish the dollar's central role in FX trading too. one reason the dollar figures in 90% of all activity is because it serves as a go-between when transactions are made between more thinly-traded currencies --say the Colombian peso for the Thai baht. but superior technology is expected one day to allow these currencies to swap directly -- rather into dollars first.
1. this is unambiguously positive. the dollar's universal acceptance has been an essential force behind the world's powerful economic expansion. this has swollen the ranks of the middle class and lifted many others from poverty. but the flip side has been a cause for concern: enduring demand for the dollar has also encouraged the us to run up enormous, some would say unsustainable, foreign debts and record trade deficits. the US now pays out the equivalent of $1mn each days for every man/woman/child in the country -- just in interest payments on that foreign debt. Washington's ability assuage international borrowers who are becoming increasingly fearful that these debts and deficits are running out of control may well determine how long the dollar can continue to enjoy its special status!
2. to understand why the dollar will have such far-reaching global effects, it helps to appreciate how almighty the buck really is. even by the standards of the economic and military superpower, the dollar's supremacy has been remarkable. while the us economy accounts for 30% of global GDP and american companies compose nearly 50% of the world's stock market cap, the dollar's dominance is greater still. it figures in nearly 90% of all trades in the more than $3.2tn a day FX market. nearly 2/3rds of the world's central bank reserves are held in dollars. the dollar is truly the world's currency in that of the $760bn in circulation, about two-thirds are held abroad.
no other currency may unseat the dollar from its mountain-top, but the euro and yuan are chipping away its dominance. many central banks have diversified their reserves to include more euros. Washington can slow this transition by cutting deficits and encouraging private savings -- helping in a dollar rally and raise its value.
the financial crises of 1997 and 98 also marked a shift. following the depletion of their dollar reserves, most Asian and Latin American countries stopped pegging their currencies to the dollar and rather let them freely float. as governments also whipped up their economies into shape, paying down their debt and building up their reserves, they found that they could borrow money through the international markets in their own currencies. global investors no longer insisted that bond transactions be in dollars.
the growing sophistication of the financial systems could diminish the dollar's central role in FX trading too. one reason the dollar figures in 90% of all activity is because it serves as a go-between when transactions are made between more thinly-traded currencies --say the Colombian peso for the Thai baht. but superior technology is expected one day to allow these currencies to swap directly -- rather into dollars first.
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