SINGAPORE (Sept 10): Back in 1965, Valéry Giscard d’Estaing, then France’s Minister of Finance, famously called the benefits that the US reaped from the dollar’s role as the world’s main reserve currency an “exorbitant privilege”. The benefits are diminishing with the rise of the euro and China’s renminbi as competing reserve currencies. And now, US President Donald Trump’s misguided trade wars and anti-Iran sanctions will accelerate the move away from the dollar.

The dollar leads all other currencies in supplying the functions of money for international transactions. It is the most important unit of account (or unit of invoicing) for international trade. It is the main medium of exchange for settling international transactions. It is the principal store of value for the world’s central banks. The Federal Reserve acts as the world’s lender of last resort, as in the 2008 financial panic, though we should recognise too that the Fed’s blunders helped to provoke the 2008 crisis. And the dollar is the key funding currency, being the major denomination for overseas borrowing by businesses and governments.

In each of these areas, the dollar punches far above the US’ weight in the world economy. The US currently produces around 22% of world output measured at market prices, and around 15% in purchasing-power-parity terms. Yet, the dollar accounts for half or more of cross-border invoicing, reserves, settlements, liquidity and funding. The euro is the dollar’s main competitor, with the renminbi coming in a distant third.

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