## The Dollar’s Primacy

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**Canonical URL:** [The Dollar’s Primacy](https://www.imf.org/-/media/files/publications/fandd/article/2022/march/joyce-books.pdf)

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### Background and context
- The COVID-19 pandemic triggered a “risk-off” flight of capital in the spring of 2020, with private investors and financial institutions turning to US Treasury bonds as the alternative “safe asset.”
- The retreat from financial markets was soon reversed, in part because of the Federal Reserve’s formidable response to the threat of a global financial collapse.
- Fifty years after President Richard Nixon cut the link between gold and the dollar reserves held by foreign central banks, the US dollar continues to play a predominant role in the global financial system, with enormous spillover effects for US monetary policy.
- Anthony Elson, a former IMF staff economist, examines these dynamics in The Global Currency Power of the US Dollar: Problems and Prospects.

### Reasons for the dollar’s dominance (findings)
- Historical roots: widespread use of the dollar for trade and financial flows traces to the emergence of the United States as the world’s largest economy after World War II.
- Market structure: US financial markets are unequaled in terms of breadth and liquidity, reinforcing use of the dollar in financial transactions.
- Network effect: widespread usage provides an incentive for new users to adopt the dollar.
- Practical benefits for US actors:
  - US international traders and investors avoid the cost of foreign exchange transactions and exchange rate risk.
  - The US government can continue to run fiscal deficits with low interest rates because of global demand for US securities.
  - The ability to cutoff access to the dollar-based global banking network through sanctions serves as a valuable foreign policy tool.

### Vulnerabilities and the “new Triffin dilemma”
- Dependence on fiscal deficits to supply safe assets to the world creates vulnerability.
- The “new Triffin dilemma” raises the question of whether there is a threshold of debt that would trigger concerns about the sustainability of US debt.
- Potential manifestations of these concerns include:
  - If interest rates rise in 2022 as the Federal Reserve responds to inflation, debt-sustainability concerns could become apparent.
  - Any increases in US interest rates will raise the cost to foreign governments of refinancing their external debt.

### Alternatives and prospects (scenarios and conditions)
- Multiple reserve currency system:
  - A system including the euro and the Chinese yuan could have advantages over the existing dollar-based system.
  - Several conditions must be met before those currencies gain more acceptance; Elson foresees the pace of adaptation and change will be slow.
- Expanded use of IMF Special Drawing Rights:
  - Greater use depends on reforms in the IMF’s operations and its voting structure, which must be negotiated.
- Digital currencies as a potential alternative:
  - Central banks are actively exploring central bank digital currencies and electronic means of payment.
  - If an international payments system emerges that is seen as safe, stable, and not dependent on any one country, the dollar’s central role may be replaced by a different form of money altogether.

### Book citation (as provided)
- Anthony Elson, The Global Currency Power of the US Dollar: Problems and Prospects, Palgrave Macmillan, London, UK, 2021, 205 pp., $24.99.

*Review by JOSEPH P. JOYCE, professor of economics, Wellesley College*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/march/joyce-books.pdf_