Weekly Updates
Weekly Updates
- The dollar’s reserve currency role gives the US a modest economic advantage. The global reserve currency will tend to have a lower cost of borrowing; investors “lend” to the economy for free (by holding cash) or for a discounted interest rate by holding bonds.
- Transactions do not grant reserve status. If China pays for Brazilian goods in renminbi, what matters is how the proceeds of that trade are stored. If Brazil holds the money in renminbi, the dollar’s reserve status is undermined. If Brazil converts its renminbi into dollars when holding its trade profits in reserve, then the dollar’s reserve status is unaffected.
- This is why asset markets are so important in determining a currency’s reserve status. Underlying asset markets need to be liquid, and allow investors to retain spending power. There needs to be confidence that the currency holder can withdraw (and convert) their reserves quickly.
- As economic nationalism increases, the political security of reserves is in question. Dollar assets still dominate reserves, however. Gold is a dollar asset—just one that the US Treasury has less direct control over. Importantly, investors do not need to have total confidence in the security of the dollar as a reserve. They just need more confidence in the dollar than in any alternative.
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