The Chinese and the Russians love to dump on the dollar. The International Monetary Fund dreams that some day its unofficial currency, the SDR, may become the worlds reserve currency. But for now, at least, the dollar is still king.
According to a study by Linda Goldberg, an international economist at the New York Fed, the dollar remains the worlds top currency by a long shot when measured in a number of different ways. Those include: foreign currency reserve holdings, foreign exchange transactions, international trade financing and international bond sales. The dollar had about an 86% share of foreign exchange transactions in 2007, for instance, slightly higher than in 1995.
Overall, despite market turbulence and substantial movements in the value of the dollar over the past decade, the dollar has not declined in prominence either as a central currency for exchange rate arrangements or as an international reserve currency, she writes. The euro, which was touted as a big rival to the dollar, hasnt been much of a challengerat least so far.
Thats good news for the U.S. Having the dollar as the international reserve helps insulate the U.S. economy from foreign shocks and reduces transaction costs in trade and finance, Ms. Goldberg writes. A big shift away from the dollar, at its most extreme, could spur a crisis featuring a destabilizing fall in the value of the currency and sharp rise in U.S. interest rates.
Why the dollars strength?. Some of it is inertia, she writes its tough for traders and central banks to switch to other currencies. Also many countries formally link their currencies to dollar, and the greenback is used to price oil, metals and other commodities.
Dont be smug, though, she warns Americans. Changes do occur. Early last century, the British pound was number one.