The future of Dollar

The dollar will not lose its preeminent status as the global reserve currency in the foreseeable future, but there will be greater exchange rate volatility. The result: Uncertainty and destabilising shifts in cross-border capital flows that will be hard to manage for policy makers and businesses alike. These are the findings of a new study by McKinsey Global Institute, An exorbitant privilege?

The implications of reserve currencies for competitiveness. The anticipated volatility in dollar value will largely be due to the reluctance of the US to maintain a stable currency through tighter monetary and fiscal policy. The study points that there are negative impacts of the US acting as a magnet to the world’s official reserves and liquid assets.

Specifically, the exchange rate of the reserve currency issuer is higher than it would otherwise be because of the increased demand for assets denominated in that currency. This higher dollar exchange rate disadvantages the US exporting firms as well as the US firms that compete against imported goods.

Dollar is the dominant reserve currency as it accounts for...

• 63 per cent of global forex reserves.
• 30 per cent of AAA-rated bonds.
• 35 per cent share of global bond issuance.
• 86 per cent of forex transactions.

... and will remain so given...

• The size of the US economy and its financial system.
• The strong tendency towards inertia in currency usage.
• Reluctance of the Eurozone authorities to assume a more prominent reserve currency role.

... but the currency will remain volatile and its value will fluctuate more than ever before.