Unit 2 · Level 2 · Currencies & FX
The dollar's throne
Since 1944 the US dollar has been the world's money: central banks keep roughly 58% of their reserves in it, most global trade is invoiced in it, and it sits on one side of nearly 9 in 10 currency trades. As a US official once told worried Europeans: 'The dollar is our currency, but it's your problem.'
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What you get asked
What makes a currency a 'reserve currency'?
Reserve status is about trust and usage, not gold. The dollar hasn't been gold-backed since 1971. Central banks hold dollars because everyone else accepts dollars, a network effect that's very hard to dislodge.
The dollar is on one side of nearly ___ in 10 of all currency trades worldwide.
Roughly 88%, per the BIS. Even a trade between, say, Brazilian real and Thai baht usually routes through dollars. It's the common language of global money.
Why does the dollar often JUMP in global crises, even crises that start in the US?
Trillions of loans worldwide are owed IN dollars. When lending freezes, everyone scrambles for dollars to pay those debts, so the dollar surged in 2008 and again in March 2020, crises born largely in America itself.
Order the 'dash for dollars' spiral in a global crisis
It's a feedback loop: the more the dollar rises, the more painful dollar debts become, the more desperately people buy dollars. Central banks now open 'swap lines' to break exactly this spiral.
Economists call US reserve status an 'exorbitant privilege'. What's the privilege?
Constant global demand for dollars means constant demand for US bonds, letting America borrow more cheaply than anyone else. A throne with real perks, which is why talk of losing it gets Washington's attention. 🐜
The rest of this unit
Why the euro in your pocket rises and falls against the rest of the world.