The Dollar Question: Where Are We?
The global crisis has led some to question the dollar’s place as the dominant currency. This column discusses three camps in the literature: those advocating a new synthetic global currency, those arguing that a new reserve currency will emerge, and those suggesting a return to sharing the role. It concludes that talk of the dollar’s death – or even its decline – are exaggerated.
The global crisis and US economic travails triggered a firestorm debate on the future of the global currency regime.
- At the London G20 Summit in April 2009 China’s central bank governor Zhou Xiaochuan slighted the dollar-centric order, calling for a super-sovereign reserve currency – a reference to special drawing rights (SDRs) housed at the IMF.1
- Russian President Dmitry Medvedev called for a mix of regional currencies;
- Some western opinion leaders warmed to the euro’s leadership (see for example Zoellick 2009).
Washington refuted these notions. Instead it pledged fiscal discipline to help buttress the greenback. ECB head Jean-Claude Trichet also argued for the dollar’s importance in the world economy (Reuters 2009a).
At last week’s G20 Summit in Toronto, currencies went practically unmentioned. This reflects the US recovery; the fall of its most plausible contender, the euro, amid Europe’s economic woes; and perhaps China’s deflecting attention from its exchange-rate management. Despite this, the debate continues to simmer as US debt and trade deficits grow. In line with the Triffin Dilemma2, this raises concerns about the dollar’s viability and trade protectionism in America. Three main camps of literature explore the alternatives to the dollar as the global reserve currency – yet each has important drawbacks.
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