U.S. dollar as the world's main reserve currency
Almost a third of foreign central banks hold the U.S. dollar as their main reserve currency.
- The U.S. enviable position as the owner of the world's most sought-after currency, has provided many advantages over the years, not the least of which is having the ability to easily borrow abroad to finance wars and deficit spending at home.
- The disadvantage is that countries with reserve currencies tend to run trade account deficits, mainly because the higher value of their currencies makes their products more expensive to export.
These persistent trade deficits, led the U.S. president in 2018 to begin a series of trade wars, hoping to keep the benefits of holding the world's reserve currency while using the threat of global trade wars to eliminate the deficits, come what may..
An isolated event in one part of the world can have an immediate effect on markets worldwide.
Global investors who are losing money in one sector often tend to sell investments in another sector, or another part of the world, to cover their losses.
- When stocks fall sharply in New York or London, emerging market funds from Brazil to India can decline sharply as investors rush to sell their shares abroad in order to raise needed cash to pay their debts at home.
- For no fault of their own, markets - especially those in developing countries - can be punished for something over which they have no control.
It works in the opposite way for countries that have currencies that are considered safe havens in time of economic turmoil.
- The Japanese yen, the Swiss franc, and the U.S. dollars, for example, tend to benefit enormously when markets crash.
- Even though it was the U.S. economic meltdown that caused the worldwide crash leading to the Great Recession in 2007, the first reaction of most global investors was to buy American dollars.