[Calxy]

The extraordinary loosening of fiscal and monetary policy in the US is the main reason the dollar's dominant reserve currency status is currently being questioned. In addition, other countries, such as the euro area and China, might eventually want to enjoy the "exorbitant privilege" accruing to the issuer of the global reserve currency at a time when countries may have to fight over a shrinking global savings pool. But achieving this status right now entails costs that neither the euro area nor China seem likely to accept. And the SDR does not present a practical alternative to the dollar.

There are at present no obvious alternatives to the dollar. That said, US fiscal profligacy will push the dollar risk premium higher over time. In other words, the US's ability to obtain cheap external funding for financing its twin deficits is likely to be curtailed. In the near term, the global economy remains too fragile to absorb the shock of a large and disorderly decline of the dollar. In that respect, the chances for co-ordinated intervention among developed economies to support the dollar are higher now than any time in the past 10 years.