The United States, China and the New World Order
At present the US dollar remains supreme as international currency. Nearly two-thirds of reserves are held in dollars and the dollar share has actually been rising over the last two decades. The dollar is the main vehicle currency used for non-bilateral foreign exchange deals. Oil and other commodities are bought and sold and priced in US dollars, and many international services (for example hotel rooms) are denominated in dollars. The US dollar is the leading currency of substitution, as evidenced by the ‘dollarization’ in Latin America and elsewhere. Finally, the dollar is the main international currency for the invoicing of export and imports, with the major (and obviously important) exception of the eurozone and EU-accession countries for which the euro dominates for both internal and external trade. This global role for the dollar brings a number of benefits1 to the United States (Chinn and Frankel, 2005). First, there is the convenience factor for US exporters, importers, borrowers and lenders in being able to transact in the home currency. Second, there is the ‘exorbitant privilege’ of being able to borrow from abroad in domestic currency. Third, there is the seignorage accruing to the issuer of non-interest bearing money. Fourth, there is the spill-over for associated intermediation services. Because of the demand for dollars, holders want to access US financial markets such as that for Treasury bonds. This process becomes self-reinforcing.
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