The Dollar’s Role: Prospects

From D. Fried, CBO Working Paper (summary):

The U.S. dollar plays an important role as the most widely used currency in global goods,
services, and financial markets. Strong international demand for U.S. dollars and dollardenominated assets associated with the dollar’s status as an international currency has increased the value of the dollar in foreign exchange markets and the value of dollar-denominated assets in financial markets. As a result, the dollar’s status has contributed to persistent U.S. trade deficits and, by lowering interest rates, to increased access to credit for U.S. households, businesses, and the federal government. Over the next decade, the dollar’s international use is expected to decline very gradually, in the Congressional Budget Office’s assessment, but it will not be overtaken by either of its closest competitors, the euro or the Chinese renminbi.

As one who’s tried to estimate empirical models of reserve currency holdings, I know the limitations of what econometrics can glean from the post-War period, in the context of highly persistent shares. Hence, useful to read the last para from the history portion of the paper :

The best assets to be used as foreign exchange reserves are those backed by credible authorities, with open capital markets. Great Britain was one of the first nations to commit to convertibility for their currency and, by successfully maintaining their peg over decades, established the pound as a credible store of value. By virtue of having maintained their gold standard for longer than all other countries, British assets were generally deemed internationally credible. In addition, Great Britain had a well-developed financial system and was the world’s largest gold market. As a result of both of those characteristics, the pound was the most widely used currency for foreign exchange reserves. (p.11)

Key words to remember — credibility, open capital markets, convertibility — when one contemplates graphs like this.

Source: Fried (2023).

As Eichengreen has noted, this observation does not preclude the RMB becoming an important regional currency, in trading, and other transactions. For more skeptical observations on the RMB overtaking the dollar anytime soon, see this post. See also Mark Sobel‘s discussion at UW Madison in last month.


15 thoughts on “The Dollar’s Role: Prospects

  1. David O'Rear

    What are we looking at here?
    I don’t believe the US economy was $13.5 (trillion, I assume) in 2020; more like $21 trn.
    And, Japan was much less than half of what this scale indicates.

  2. ltr

    China’s currency is already important, but an objective of replacing any other currency has never been expressed by a policy-directing Chinese economist or central political leader. What is however an objective, is being sure that another currency cannot be used through sanctions to attack the Chinese economy. The point is that China, as other nations, has a right to develop and that right is being and will be protected.

    What gained a special and lasting animosity for the Chinese government from 2011 on, was the Chinese government’s expressed determination that the country develop technologically. Simply look to Congress passing and the President signing of the Wolf amendment in April 2011:

    1. Macroduck

      Selective reading of history isn’t history.China has far more restrictive laws on investment, trade, technology transfer and market access in general than does the U.S.

      The Wolf amendment is predicated on U.S. national security concerns. If nations have rights, which is an odd claim for any China apologist to make, then foremost among them must be the right to its own defense.

      Finally, it is utterly hypocritical, completely reprehensible, for a China apologist to whine about “rights”; China is actively working to undermine the system of international law in which any such rights can exist. Xi’s China has no regard for the rights of non-Chinese, and apparently no regerd for the rights of Chinese, eiher. Xi has ends Hong Kong’s self-rule, contrary to promises made at the hand-over. Xi has ended the practice of Chinese leaders retiring after a period in power, drawing all power to himself. Xi has reversed the expansion of private rightsfor Chinese citizens.And here’s ltr, blabbering about the “right to development, while China enslaves Uyghurs. Sickening.

      1. Anonymous

        nations do not have rights, they have prerogatives backed up by power local and naval/military.

        a lot of nations’s names could be put in place of ji-nuh and personalities for xi….

        1. ltr

          a lot of nations’s names could be put in place of —— …
          a lot of nations’s names could be put in place of —— …
          a lot of nations’s names could be put in place of —— …

          [ Bizarre prejudice, so that very the name of a nation must be besmirched. ]

      2. JohnH

        Finally, it is utterly hypocritical, completely reprehensible, for a US apologist to whine about “rights”; the US is actively working to undermine the system of international law in which any such rights can exist. The US has no regard for the rights of sovereign nations and has illegally occupied countries such as Iraq and parts of Syria, applied economic sanctions without approval by the United Nations, and ignored treaties it signed with populations under its control.

        Ducky loves to self righteously lambast others but does nothing to clean up US behavior.

        1. pgl

          Lord – you are the most pathetic troll ever. Please go pollute John Cochrane blog since you admire his garbage so much.

        2. pgl

          FYI Jonny come lately. My dear daughter decided to go into law as she actually gives a damn about the rights of American Indians. I never thought she would be a lawyer but her abilities in representing their rights makes dad proud. If she had to endure the serial garbage you spew – she would just laugh. That is what she does when facing a stupid bully which you clearly are.

        3. pgl

          “The US has no regard for the rights of sovereign nations and has illegally occupied countries such as Iraq and parts of Syria”

          Neither is true but Putin still has his war criminals in Ukraine. Which of course a disgusting POS like you applauds.

        4. pgl

          “Congress held its first hearing about establishing a non-voting delegate seat for the Cherokee Nation on Wednesday. The historic move is the closest the federal government has gotten toward satisfying a promise it made to the Cherokee Nation nearly 200 years ago.”

          Wow – one more seat in Congress is so much more important than Ukranians having a right to live without fear of Russian war crimes where in their own home land.

          1. JohnH

            The Smithsonian article, which pgl never bothered to look at, begins: “The pages of American history are littered with broken treaties. Some of the earliest are still being contested today. The Fort Laramie Treaty of 1868 remains at the center of a land dispute that brings into question the very meaning of international agreements and who has the right to adjudicate them when they break down.”

            If the US wants to hector others about some mythical “rules based order,” it could start by abiding by the agreements it signed.

        5. JohnH

          Here’s one for Ducky and pgly to chew on: “Of the 84 countries codified as autocracies under the Regimes of the World system in 2022, the United States sold weapons to at least 48, or 57 percent, of them. The “at least” qualifier is necessary because several factors frustrate the accurate tracking of U.S. weapons sales. The State Department’s report of commercial arms sales during the fiscal year makes prodigious use of “various” in its recipients category; as a result, the specific recipients for nearly $11 billion in weapons sales are not disclosed.”

          Who do you think that autocracies will use their weapons on? Most likely it will be their own people, particularly any dissidents who have the chutzpah to fight for democracy and human rights and against corporate exploitation.

          Ducky and pgly claim to be fervent advocates of democracy and human rights…but only for countries that are outside the US sphere of interest… As for autocracies in the US sphere of interest, the policy is the same as when Somoza was savaging his own people–“He may be an SOB, but he’s our SOB.” –Franklin Roosevelt

        6. baffling

          Johnny, I notice you make no comment on the illegal occupation of Ukraine by Russia, which has included war crimes and indiscriminate intentional killing of civilians-murder. you have never said a bad word about putin.

          you amuse me Johnny. it is obvious you have been paid for (or brainwashed?) to support an evil dictator such as putin. and so you besmirch the United States, constantly, and gripe because the usa is not more socialist. and yet putin is not even close to being a socialist-he is a dictator. inequality is perk of the Russian system today. you cannot even keep your ideology consistent, Johnny.

  3. Moses Herzog

    It was a terrific talk between the 3 of you, and the audience participants. Terrific stuff. The type content that higher education should strive to embody.

    No people, neither Menzie nor Mr. Sobel sent me a cashier’s check to say that. Menzie did offer to refrain from calling me the most annoying adult beverage drinker who ever posted on Econbrowser while imbibing if I could get the orange abomination to stop pronouncing China as “Jy-nuh” but I failed.

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