A World of Multiple Reserve Currencies

BERKELEY – The competition for reserve-currency status is conventionally portrayed as a winner-take-all game. There is room, in this view, for just one full-fledged international currency. The only question is which national currency will capture the role.

Market logic, it is argued, dictates this result. For importers and exporters, quoting prices in the same currency – say, the dollar – as other importers and exporters avoids confusing one’s customers. For central banks, holding reserves in the same currency as other central banks means holding the most liquid asset. With everyone else buying, selling, and holding dollars, it pays to do the same, since markets in dollar-denominated assets will be the deepest.

While it is always possible that there could come a tipping point at which everyone migrates from one currency to another, the network-based nature of the international monetary system, it is said, leaves room for only one true international unit.

But this premise is wrong, for three reasons. First, the notion that importers, exporters, and bond underwriters will want to use the same unit as other importers, exporters, and bond underwriters holds less weight in a world where everyone has a mobile phone that can compare currency values in real time. Once upon a time, comparing prices in dollars and euros might have been beyond the capacity of all but the most sophisticated traders and investors. Nowadays, “Currency Converter” is one of the Apple app store’s top ten downloads.