How long can USD stay th4e dominant inte4rnational currency?
• Recent SDR/China talk has roiled markets a bit
• Historical lessons point to a very long transition, if any
• The key factors: will Euro become large enough (either through growth or by countries joining), and will USD depreciate substantially
Big View: The Reserve Currency
Economy / trade
• Being the largest economy / trade partner makes a country’s currency important
• Currency used for invoicing, especially for commodities
Depth of financial markets
• Liquid financial markets absolutely crucial for holding a currency
• Safety overrules returns (so far)
Confidence in currency value
• Inflation fears that diminish a currency reduce its value to hold internationally
• Frequent intervention also makes a currency less attractive to hold
Inertia
• Typically currency holdings change only after a long time
• Speed of adjustment “typically” very slow
Lessons from the Past: GBP to USD
• GBP was dominant currency in the 1800s
• Even after US economy became larger than UK, GBP still dominant
• Even after US trade become larger than UK, GBP still dominant
• Very few international transactions were in USD through 1913
• One key factor was central bank; no Federal Reserve until 1913
• World War I started degradation of GBP; inflation period paid for the war
• World War II marked end of GBP, as Bretton Woods set USD as Nth currency
• Inertia strongly characterizes shift over into other dominant currencies
• But the ultimate less of the switchover from GBP to USD:
• It takes a very long time for handover to happen
• Don’t wait for SDRs to take over
The Reserve Currency
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