Are the US dollar’s days really numbered?

Some years ago, I attended a small luncheon on the outlook for the U.S. dollar. Paul Volcker, the former Federal Reserve chairman, was the guest of honor. In response to a chorus of Cassandras who argued that the U.S. economy’s all too apparent weaknesses would lead to an inevitable dollar collapse, Volcker made a simple observation: For the dollar to depreciate, he said, it would necessarily have to depreciate against another currency. And in Volcker’s view, at that time, the U.S. economy was fundamentally no weaker than that of any competing countries.

Volcker’s logic would seem equally pertinent today in responding to the many critics who believe that the Federal Reserve’s unprecedented quantitative easing policy will lead to the dollar’s imminent demise as a reserve currency. If the dollar is to lose its reserve status, as epitomized by the fact that more than 60 percent of the world’s foreign exchange and more than 85 percent of world trade is still denominated in U.S. dollars, some other currency would need to replace it. A close examination of the world’s other major currencies reveals that a currency is yet to emerge that offers the liquidity, depth of financial markets, and store of value that the U.S. dollar does.

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Policy implications of the new US labor market normal

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