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
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By | 2014-09-11T13:40:50+00:00 March 10th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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