Everybody’s got an opinion on the dollar, ranging from its aesthetics (for the most part, people think greenbacks lack that) to its utility (we hear a lot from folks bemoaning its use as a fiat currency).
Voices were raised in recent months in favor of doing away with the dollar as a reserve currency, the most strident emanating from exporters of dollar-denominated commodities, such as Russia, and nations like China that hold large swatches of U.S. government paper.
So, what’s a reserve currency and why should the buck get the boot?
A reserve currency is a simply a store of value, held by a central bank and denominated in the legal tender of another nation, that facilitates international trade and foreign exchange. The modern notion of a reserve currency came about in the late 19th century along with the emergence of the international gold standard.
The U.S. dollar is the most widely held reserve currency, representing about two-thirds (10-year weighted average: 65.9%) of central bank foreign exchange holdings. The hegemony enjoyed by the greenback makes it easier for the U.S. to run and maintain high trade deficits, a consequence of the nation’s debt-financed consumerism and low savings rate. The greenback’s preeminence is eroding, though. Its allocation in central bank reserves has been chipped away at a rate of 70 basis points (0.7%) a year over the past decade.
Dollar Ain’t Perfect, but What’s Better? – Brad Zigler, Hard Asset Investor
