The US dollar remains the dominant currency for international trade and investment. Its role in the world economy reflects the unrivalled depth and liquidity of US dollar capital markets, backed by America’s high quality political and economic institutions.
But contrary to popular myth, the US dollar’s role owes very little to its status as a so-called "reserve currency", according to a new research report from the director of the United States Studies Centre's Trade and Investment program, Dr Stephen Kirchner.
"The strength of the US dollar exchange rate is often viewed as a measure of the strength of the US economy, at least on a relative basis. However, the US dollar plays a unique role in the global economy that reflects fundamental strengths of the US economy and political system. " Dr Kirchner writes.
"These strengths are for the most independent of the economic cycle, domestic politics and the ups and downs of exchange rates — although the United States is not immune to concerns about the long-term sustainability of its public finances and the state of its domestic politics."
The report examines the US dollar’s global role and its implications for Australia. It also looks at the extent to which the US dollar and other currencies can be "weaponised" as part of a currency war.
- Contrary to popular myth, the US dollar’s role owes very little to its status as a so-called "reserve currency". The US dollar share of the world’s foreign currency reserves is a symptom, not a cause, of its dominant role.
- The Trump administration’s trade war has strengthened the US dollar exchange rate by around 12 per cent in real terms, exacerbating trade tensions and threatening a protectionist spiral.
- The international role of the US dollar enhances the contribution the bilateral investment relationship with the United States makes to the Australian economy and complements the diplomatic and security relationship.
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