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Handbook of Exchange Rates by Lucio Sarno, Ian Marsh, Jessica James

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19.13 Changing Role of the Dollar as the International Reserve Currency

The role of the dollar has been challenged quite frequently by many commentators over the years, most recently due to the global financial crisis and before that, the emergence of the Euro. Nevertheless, it remains the preeminent international currency. While changes in its global status are possible, factors such as the large size and dynamism of the US economy, dollar pricing of oil, and other commodities, its' use as a major form of global physical currency, lack of a significantly better alternative, and simple inertia will likely perpetuate the dollar's role for a significant amount of time.

Fundamentally, the dollar plays a central role in international trade and finance as both a store of value and a medium of exchange. Most countries have chosen the dollar to be the vehicle currency, in the conduct of monetary policy (for countries with small or limited bond markets), the invoice currency of choice in international trade, the preferred official intervention currency, and the principal official reserve asset. Its prominence is mainly due to the following factors:

  • Major Form of Cash Currency The majority of dollar banknotes are estimated to be held outside the United States (Fig. 19.4). More than 70% of hundred-dollar notes and nearly 60% of twenty- and fifty-dollar notes are held abroad, while two-thirds of all US banknotes have been in circulation outside the country since 1990.
  • Approximately $580 ...

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