Dollar's role as world's leading reserve currency may be at risk

the United States’ erratic policy making has kindled fears that the dollar could lose its perch as the world’s reserve currency - what former French president Charles de Gaulle called America’s “exorbitant privilege.”
the United States’ erratic policy making has kindled fears that the dollar could lose its perch as the world’s reserve currency - what former French president Charles de Gaulle called America’s “exorbitant privilege.”
By Eduardo Porter

Remember the last time the country came to the brink of default? It was August 2011. For the first time in history, Standard & Poor's, the ratings agency, downgraded US government debt.

"The effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges," it said.

Investors around the world rushed to find a safe place to put their money.

Rather than dump America's downgraded bonds, however, investors flocked to them. The dollar strengthened. The United States might have become a threat to the world economy, but with even worse troubles developing elsewhere, including a flare-up in the euro crisis, it was still its safest place.

As George Soros, the hedge fund investor, told me in an interview Friday, "The dollar is the weakest currency except for all the others."

The dollar's resilience comes to mind as Congress again flirts with financial disaster.

As time ticked down to a possible government default as early as Thursday, Republicans in the House failed once again Tuesday to agree on a proposal to relieve the impasse, reopen the government and lift the debt ceiling.

"How can the United States preserve its financial and security leadership role when it conducts itself with such ineptitude and such disregard for the consequences for the world?" asked Charles Dallara, a senior Treasury official for the former presidents Ronald Reagan and George H.W. Bush who until earlier this year headed the Institute of International Finance, a lobby group of international banks.

Hosting finance ministers from around the world last week at the International Monetary Fund's fall meeting in Washington, Christine Lagarde, the fund's managing director, told NBC's "Meet the Press" that failing to lift the debt ceiling would cause so much disruption to the world economy that "the standing of the US economy would, again, be at risk."

Indeed, the United States' erratic policy making has kindled fears that the dollar could lose its perch as the world's reserve currency - what former French president Charles de Gaulle called America's "exorbitant privilege."

Today almost two-thirds of the world's foreign currency reserves are held in dollar assets, mostly Treasury bonds. Nearly half the foreign debt securities in the world are in dollars, as are more than half the world's cross-border loans and deposits.

It made sense for other countries to embrace the dollar in an earlier era, when the United States was willing to act as guarantor of global stability. But today, with Republicans in Congress wielding default as a lever in a vain attempt to kill Obamacare, perhaps it is no surprise that the rest of the world is getting more serious about finding an alternative.

"It is perhaps a good time for the befuddled world to start considering building a de-Americanized world," said a statement Monday by Xinhua, the state news agency of China - which holds some $1.3 trillion in Treasury bonds.

The prospect is sending shivers down Americans' spines. Robert J. Barbera, the co-director of the Center for Financial Economics at Johns Hopkins University, told my New York Times colleague Floyd Norris that allowing the dollar to lose its status as the world's premier reserve asset "would be the single greatest mistake in American economic history."

Yet for all the dysfunction on display in Washington, the hand-wringing is overwrought. Several things must be kept in mind: First, it is inevitable that the dollar will gradually lose its position as the world's monopoly reserve currency. In some ways, it already has.



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