[Column] Even the mighty dollar may fall

A reserve currency is the standard currency for international trade and transactions. Ever since World War II, the US dollar has functioned as the de facto reserve currency for 80 years. The US dollar is involved in 88% of global transactions and represents 57% of foreign reserve holdings worldwide. A full 85% of South Korea’s export payments are made in US dollars. It would not be an exaggeration to say that the US dollar is the backbone of the world economy.

A single reserve currency benefits most countries because of the convenience and transaction efficiency it offers. Of course, the country that issues the reserve currency reaps the most profit. Americans rarely have to change currencies when traveling abroad. The US Mint only has to devote a few cents to create 100-dollar bills, but those from foreign countries need to offer services or goods that correspond to the bill’s value, meaning that the US sees significant seigniorage when minting money.

An even bigger boon is the fact that US companies and the government can raise money at lower costs as foreigners buy US stocks and bonds. This is the reason the US has not entered a fiscal crisis despite its massive national debt and fiscal deficit, with its national debt as a percentage of gross domestic product over 100% and fiscal deficit estimated to be around 7% of the GDP.

US citizens have also benefited from the low interest rates on mortgages to buy homes, which prompted Valery d’Estaing, who was the French minister of finance at the time, to lambaste the US and its “exorbitant privilege” in the 1960s, claiming that Americans were able to enjoy high standards of living due to support from foreigners. 

Recently, the Donald Trump administration’s tariff war and unpredictable policy decisions have shown signs of shaking the dollar’s status in the world economy. During the 2008 global financial crisis, the dollar was strengthened by a surge in demand for US Treasury bonds, a safe haven asset, even as US stock prices plunged. However, even US Treasury bonds are facing a crisis as they are being sold off in bulk.

If a country wants to establish its currency as a reserve currency, it needs to have a large financial market, be open to capital flows, and have a trustworthy rule of law. No investor will buy the bonds of a country if they cannot trust its government. 

If the dollar’s status falters, international trade and financial markets might be thrown into chaos. That being said, this does not mean that the world as we know it will collapse. History shows us that multiple currencies have served as reserve currencies, and the US dollar is the only currency that has enjoyed being uncontested. If the US continues to lose its credibility, we will, in the medium- to long-term, watch the beginning of a financial system with multiple currencies — the US dollar, the euro, the yuan and others — competing against each other.

By Park Hyun, editorial writer

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