from D. Fried, CBO Working Paper (Summary):
The U.S. dollar plays an important role as the most widely used currency in global commodities,
services and financial markets. Strong international demand for dollars and dollar-denominated assets associated with the dollar’s status as an international currency increases the value of the dollar in foreign exchange markets and the value of dollar-denominated assets in financial markets. The dollar’s status thus contributes to persistent U.S. trade deficits and increases access to credit by U.S. households, businesses, and the federal government through lower interest rates. International use of the dollar is projected to gradually decline over the next decade, but not to be replaced by its closest rivals, the euro or the yuan, according to the Congressional Budget Office’s assessment.
As someone who has attempted to estimate empirical models of reserve currency holdings, I am aware of the limitations of what econometrics can glean from the postwar period in the context of highly persistent stocks. Therefore, it is useful to read the last paragraph of the history section of this article:
The best assets to use as foreign exchange reserves are those backed by reliable authorities and with open capital markets. Britain was one of the first countries to commit to convertibility of its currency and has established the pound as a reliable store of value by successfully maintaining the peg for decades. Having remained on the gold standard longer than all other countries, British assets are often considered internationally reputable. In addition, the UK has a well-developed financial system and is the largest gold market in the world. Because of these two characteristics, the pound is the most widely used currency in foreign exchange reserves. (page 11)
Key words to keep in mind when one considers a chart like this – credibility, open capital markets, convertibility.
source: Fried (2023).
As Eichengreen points out, this observation does not preclude the renminbi from becoming an important regional currency in trade and other transactions.For more skepticism that the yuan will overtake the dollar soon, see here postal. See also Mark SobelA discussion last month at the University of Wisconsin-Madison.
