Sterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competition

One can hardly pick up a financial newspaper these days without seeing a story on the dollar’s impending loss of international preeminence. This may simply reflect the instinctual tendency for financial journalists to find a seat on the nearest bandwagon and ride it for all it is worth. As Mark Twain might have said, reports of the dollar’s death have been greatly exaggerated. The dollar is still the dominant reserve currency for central banks and governments. The share of international reserves in dollars has actually been rising, not falling. The market in U.S. treasury securities is still the single most liquid financial market in the world, which makes it attractive for central banks to hold their reserves in this form. The dollar is still the dominant invoicing and vehicle currency in international trade. Petroleum and other commodities are still invoiced in dollars. There are, of course, good reasons for questioning whether this will remain the case. The dollar has fallen by 16 percent on a trade weighted basis from its peak at the beginning of the decade. More importantly, never before have we seen the extraordinary situation where the country issuing the leading international currency is running a current account deficit of 6 percent of GDP. Never before have we seen the reserve currency country in debt to the rest of the world to the extent of 25 percent of GDP. The connections between U.S. budget deficits, themselves partly a reflection of the country’s overseas military commitments, and the weakness of the currency suggest parallels with the trials of the dollar in the 1960s and the tribulations of sterling after World War II. All