The Dollar and Its Rivals

CAMBRIDGE – Since 1976, the US dollar’s role as an international currency has been slowly waning. International use of the dollar to hold foreign-exchange reserves, denominate financial transactions, invoice trade, and as a vehicle in currency markets is below its level during the heyday of the Bretton Woods era, from 1945 to 1971. But most people would be surprised by what the most recent numbers show.

There is an abundance of explanations for the downward trend. Since the Vietnam War, US budget deficits, money creation, and current-account deficits have often been high. Presumably as a result, the dollar has lost value relative to other major currencies or in terms of purchasing power. Meanwhile, the US share of global output has declined. And, most recently, the disturbing willingness of some members of the US Congress to pursue a strategy that would cause the Treasury to default on legal obligations has undermined global confidence in the dollar’s privileged status.

Moreover, some emerging-market currencies are joining the club of international currencies for the first time. Indeed, some analysts have suggested that the Chinese renminbi may rival the dollar as the leading international currency by the end of the decade.

But the dollar’s status as an international currency has not fallen uniformly. Interestingly, the periods when the public is most concerned about the issue do not coincide with the periods when the dollar’s share in international transactions is in fact falling.