The Congressional Budget Office has produced a paper entitled “The U.S. Dollar as an International Currency and Its Economic Effects” which they summarized as follows:
The U.S. dollar plays an important role as the most widely used currency in global goods, services, and financial markets. Strong international demand for U.S. dollars and dollar-denominated assets associated with the dollar’s status as an international currency has increased the value of the dollar in foreign exchange markets and the value of dollar-denominated assets in financial markets. As a result, the dollar’s status has contributed to persistent U.S. trade deficits and, by lowering interest rates, to increased access to credit for U.S. households, businesses, and the federal government. Over the next decade, the dollar’s international use is expected to decline very gradually, in the Congressional Budget Office’s assessment, but it will not be overtaken by either of its closest competitors, the euro or the Chinese renminbi.
The U.S. dollar is the world’s primary reserve currency, meaning that it is the most widely held currency by central banks and other official institutions. The dollar’s status as an international currency has a number of economic effects, both positive and negative.
On the positive side, the dollar’s status as an international currency makes it easier for U.S. companies to do business overseas. When U.S. companies sell goods or services to foreign buyers, they can invoice them in dollars. This makes it easier for the buyers to pay, and it also reduces the risk of currency fluctuations. The dollar’s status as an international currency also makes it easier for U.S. investors to invest overseas. When U.S. investors buy stocks or bonds in foreign companies, they can often do so in dollars. This makes it easier for investors to diversify their portfolios and take advantage of investment opportunities in other countries.
On the negative side, the dollar’s status as an international currency can make the U.S. economy more vulnerable to shocks from abroad. For example, if there is a financial crisis in another country, it can lead to a decline in the value of the dollar. This can make it more expensive for U.S. companies to import goods and services, and it can also lead to a decline in U.S. exports.
The dollar’s status as an international currency can also make it more difficult for the U.S. government to manage its own economy. For example, if the U.S. government runs a budget deficit, it will have to issue more Treasury bonds. This can lead to an increase in the supply of dollars, which can put downward pressure on the value of the dollar.
Overall, the U.S. dollar’s status as an international currency has both positive and negative economic effects. The benefits of the dollar’s status as an international currency include making it easier for U.S. companies to do business overseas and for U.S. investors to invest overseas. The drawbacks of the dollar’s status as an international currency include making the U.S. economy more vulnerable to shocks from abroad and making it more difficult for the U.S. government to manage its own economy.
