Demystifying the Economy | The power of the reserve currency

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Posted at 7am yesterday

Delphine Belzile

Delphine Belzile
The press

Why is the US dollar the reserve currency? What advantages does this bring to the USA?

Michael Jacques

First, a reserve currency is a “currency of choice in international transactions.” Countries will want to acquire it and hold it in the event of monetary instability,” explains David Dupuis, an economics professor at the University of Sherbrooke and a former economist at the Bank of Canada.

For example, a country whose currency is no longer recognized in the international market could use its US dollar reserves to repay its debt. In other words, the reserve currency ensures financial stability, David Dupuis points out.

In Argentina, the central bank recently put inflation at 90%. Tuesday that New York Times claimed that “due to the collapse of the Argentine peso, particularly in recent months, the US dollar is king in Argentina”. The population, no longer trusting their national currency, is holding US dollars in reserve to ensure financial stability, explains David Dupuis.

Despite the high national debt, the United States has the most stable economy in the world. We therefore want to keep our government’s debt.

David Dupuis, Professor of Economics at the University of Sherbrooke

We are also talking about the US dollar as a reserve currency, since foreign countries use it as an asset in their financial accounts, the specialist specifies. Since there is no financial gain to be gained from holding a currency, countries tend to convert it into US Treasuries to take advantage of interest rates.

The most important world currency

According to David Dupuis, the US dollar is the most important world currency for two reasons, one historical and one economic.

After World War II, the international community abandoned the dominant monetary system, the gold standard, in favor of a currency regime. The new monetary system ensured a fixed exchange rate: the US dollar is linked to gold, foreign currencies to the US dollar, explains David Dupuis. The greenback then became a global currency.

Under the Nixon administration, Americans distanced themselves from gold and currencies began to fluctuate. However, since the country has the “largest, most liquid and deepest financial market in the country”, everyone still wants to hold the US dollar, emphasizes David Dupuis.

Staying away from the American currency is a guarantee of stability.

David Dupuis, Professor of Economics at the University of Sherbrooke

Being an issuer of a global currency has advantages: Strong demand for the US dollar keeps the currency’s value high. For the United States, “everything on the market costs less,” explains David Dupuis. It simplifies transactions in the international market.

In addition to the US dollar, central banks have an interest in holding the yuan, euro and sterling as reserve currencies to facilitate international payments.

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