Weekly Updates
Weekly Updates
- The war in Ukraine has provoked the most debate about reserve currency status since the global financial crisis, if not the creation of the euro. Is there a risk to the dollar’s status? Does it matter?
- There are two “reserve” roles. Official foreign exchange reserves are held by central banks, and the dollar dominates. Private foreign exchange reserves are used for invoicing international trade, with the dollar and the euro dominating. Both have become more important invoicing currencies recently.
- Official and private reserve currencies have basic characteristics. There must be a steady currency supply—by running a current account deficit (US today), or by widely reinvesting overseas (nineteenth century UK). There must be a large, liquid, low-risk asset market where reserves can be held. Capital controls prevent reserve currency status—users need to get their money on demand. The US freezing Russia’s central bank assets arguably reduced this reserve characteristic. However, freezes like this have happened before; the dollar’s reserve status is safe if investors view US liquidity risk as less than elsewhere.
- The 2021 demand surge took real global trade in goods to a record share of GDP in 2021. However, the trend towards localization suggests a falling share over time. That will reduce the importance of reserve currency status, whether official or private.
Stay up to date
Stay up to date
