Reserving the Future

What is the cost of the Dollar’s prominence?

That’s kind of a funny question. Most commentators assume that since the Dollar is the world’s reserve currency, it’s kind of a free ride for all those free-spending Americans. After all, if companies and nations didn’t have to borrow and invest in Dollars, wouldn’t we all be paying more for our mortgages?

Well, yes and no. Yes, the Dollar’s reserve status means interest rates are lower, but there really isn’t a free lunch out there. Because capital flows so freely into Dollars, the greenback has a much higher level than it otherwise would. Some economists estimate that the Dollar is as much as 30% overvalued because of global capital flows.

That has a cost. It means that labor in the US is overpriced. It means the exports from the US don’t return as much. It means that our economy bears a real cost for facilitating global trade.

What can we do about it? Not much. We don’t want to start reneging on contracts or instituting capital controls just because the Dollar is too high. The consequences of that kind of policy uncertainty would be disastrous. But we shouldn’t worry if other currencies begin to become more prominent. A Russian oil company is considering borrowing in Yuan instead of Dollars. That’s reasonable if they’re building capacity there. And as the Chinese economy grows, they will need a domestic debt market.

If the world moves to having multiple reserve currencies, it may help US companies be globally more competitive. One thing’s for certain: the Dollar can’t be king forever.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350 • •
By | 2014-09-11T13:40:50+00:00 March 10th, 2011|Global Market Update|0 Comments

About the Author:

Leave A Comment