The US Dollar as the World’s Reserve Currency

The US dollar has been remaining the world’s global reserve currency for a considerable period of time. Such a status in the global economic system has its own peculiar positive and negative consequences. The fact is, the USA currency is the most stable and prospective “player” on the markets, bringing the effect almost on every economic system in the world.

To begin with, the Bretton Woods system of the US economy seemingly was developed in the middle of the twentieth century to give the currency of the United States a certain kind of stability and competitiveness. The main link of this currency was the prices and position of gold on the market field. Later, there was a shift to linking the dollar to floating rates, because this was the demand of the time. Now one can observe the US dollar as a solid currency but capable of becoming versatile according to the market requirements (Warnock, 2017).

Moreover, the reserve status of the US dollar has certain reasons. First of all, the price determination for almost all markets, goods, and services is influenced by the currency under discussion; the prices are developed according to the dollar rates. Second, the American financial markets are transparent, and this is added to the fact that the global dollar market is obviously the largest one. Another reason is the military force provided by the USA. Many countries now rely upon America in these terms, which adds to the solidity and the perspective of the US dollar.

As has already been mentioned, there are certain positive grounds for the US dollar to stay the reserve currency. Among the most obvious and working effects, one can mention the notion of currency seigniorage and the low level of the interest profit margins for the outward loans. Not all economists now agree to admit the notion of seigniorage, which consists of the lower prime costs of currency units’ production for more stable and popular currencies. Nevertheless, it is seemingly clear that the more popular the currency is, the more demand for it exists. Thus, its production amounts increase. The US dollar manages to have lower prime costs, exactly due to being the reserve and the most developed currency in the world. As for the field of outward loans, here, the US dollar wins its place, due to the stability of the currency markets. The US markets are known as the ones, which have never known any default wavering. That is why they are trusted, and the interest profit margins can be established at a lower level for the USA (Warnock, 2017).

In terms of the negative effects, there is only one, but rather a large notion to be mentioned here. The stable and competitive nature of the national currency gives less competitiveness to the inner markets and goods producers. From the point of view of the economy, the weaker currency is more profitable for the country, because it lets the homegrown production set competitive prices. Being a solid currency, the US dollar affects the price making process greatly. The homegrown goods become cheaper and their producers – less competitive in the global markets. More than that, the privilege of having the reserve currency can also be a burden for the US economy, as the reserve status of the US dollar can never be excluded from building the financial policies in the country (Warnock, 2017).

Overall, as every notion, the reserve status of the US dollar has its own positive and negative effects. In these terms, one can observe the economic system as the solid and stable one but less competitive from the point of view of inner markets. Nevertheless, the privilege is still there. Being the reserve currency, the US dollar is capable of being a warrant of stability and offers much more competitiveness in the global markets. Together with that, it is obvious that the status of the currency under discussion will still be one of the leading ones in the global price making policies in the nearest time.

Reference

Warnock, F. (2017). Prospective capital flows and currency movements: U.S. dollar versus Euro. Darden Business Publishing Cases, 1(1), 1-23.