Though some readers may remember the days when the British pound was the global reserve currency of choice, that position has been held by the United States dollar for quite a while now. One question, though, is the extent to which the U.S. economy and its participants benefit from that status. While there are certain undeniable advantages to having the world adopt your currency as the reserve currency of choice, Americans do not necessarily enjoy the windfall profits and advantages that some outside of the United States suggest. (Learn how the Bretton Woods system got the ball rolling for world trade. See Global Trade And The Currency Market.)

IN PICTURES: 5 Money-Saving Shopping Tips

Paying a Little Less for Commodities?
As the preeminent global reserve currency, many international commodities are priced and traded in dollars - including oil and gold. That means that foreign buyers have to exchange their euros, yen or yuan to dollars before buying those commodities, and that represents an added cost that Americans do not have to pay. Although currency exchange rates can be significant at the small scale (a small company doing business overseas, or an individual traveler exchanging money), they are not nearly so significant any more for large international concerns and the added cost is relatively minor.

There is a less-appreciated source of profits that America does enjoy, though. America profits from the issuance of its currency to nonresidents, something referred to as seigniorage. In other words, the U.S. quite literally gets paid for its currency. That is perhaps not so surprising to those who've traveled overseas and encountered merchants happy to take U.S. dollars outright (and sometimes at better exchange rates than the "official" rates) or seen TV footage of narco-busts with piles and piles of U.S. currency sitting in trucks or warehouses around the world. Even though the estimated profits from this are modest (perhaps $10 billion), it is almost literally free money, and an extra $32 per head in national income does not hurt.

Cheaper Debt
One area where the dollar's status does matter in is interest rates. The dollar's status as a reserve currency creates a far larger market for dollars and dollar-denominated debt than would otherwise be the case. That, in turn, has effectively meant that the world subsidizes the U.S. with lower interest rates. A study by McKinsey estimated that U.S. rates are 50 to 60 basis points lower than they would be otherwise; a major consideration given the $14 trillion in U.S. public debt outstanding.

Keep in mind, too, that it is not just the U.S. government than benefits from this interest rate subsidy. Virtually all debt in the United States is pegged in some fashion to the prevailing Treasury rates (whether explicitly or implicitly). If a bank can buy a Treasury bond and earn 4% a year, it only stands to reason that loan prices will be similar - and if Treasury rates fall, loan rates fall. Consequently, any American with a mortgage, car payment, student loan or credit card bill is getting a bit of a break because of the status of the dollar itself. (Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy. Check out Corporate Bonds: An Introduction To Credit Risk.)

The Skewing Of Trade
Reserve currency status also impacts a country's trade both for good and ill. In simple terms, the U.S. gets to pay for imports with its own currency, and that makes a balance of payments crisis far less likely (as a global reserve currency, it is difficult to imagine exporters refusing to accept U.S. dollars).

This is not uniformly positive, though. The excess demand for the currency would suggest that the prevailing value of the dollar is higher than it deserves to be - meaning that U.S. exports are less competitive. So companies competing with foreign imports are at a disadvantage, and the companies are incentivized to move production (and jobs) outside the U.S. That is the trade-off - Americans pay less for imports than they otherwise would, but many of their employers have a tougher time because of it and some of their jobs may be at risk.

On the flip side, there is a somewhat amusing advantage to the dollar's status that plays into both trade and interest rates. The U.S. basically has the luxury of exporting inflation to its trading partners - a circumstance that China is now struggling to deal with without wrecking its own economy.

IN PICTURES: Top 10 Forex Trading Rules

On Balance, a Positive - But Not a Huge One
Given that no economist can truly observe what U.S. interest rates, prices, and trade would be like if the dollar were not the reserve currency of choice around the world (they can only model and guess), the question of how much the U.S. benefits is always going to be open to debate and dispute.

Trade has probably been something of a wash, as the outsourcing of manufacturing and the competitive impact of an overvalued dollar has to be considered a cost. With interest rates, though, it is difficult to argue that Americans have not benefited significantly from the status of the dollar. Given the large amount of debt in the United States at the government, corporate and individual levels, any reduction in interest rates is bound to translate into a large savings, to say nothing of the idea that the very size of the debt load has likely itself been facilitated by the dollar's status.

With that in mind, then, U.S. investors should not be ambivalent to the future of the dollar as a reserve currency, or the ideas of alternative approaches like a revived gold standard or artificial "world currency." With so much of the U.S. economy revolving around an axis of cheap debt, perhaps Americans really cannot afford to have the dollar lose its status as the go-to worldwide reserve currency. (Think the value of gold is unshakable? Read this chronicle of its rise and fall. Check out The Gold Standard Revisited.)

For the latest financial news, check out Water Cooler Finance: Google Shakes Things Up.

Related Articles
  1. Economics

    The 4 Countries That Produce the Most Food

    Learn about the four food superpowers -- China, India, the United States and Brazil -- and what sets them apart from the rest of the world.
  2. Investing Basics

    Learn How To Trade Crude Oil in 5 Steps

    Crude oil and energy markets are specialized venues. Here are five steps to take to build consistent profits.
  3. Forex Education

    The Most Famous Forex Traders Of All Time

    The five most famous forex traders share common virtues such as strong self-confidence.
  4. Forex Fundamentals

    Buying Yuans as a Long-Term Investment: Risks and Rewards

    Examine the current state of the Chinese currency, the renminbi/yuan, and learn whether it is considered a good long-term investment.
  5. Economics

    Is the U.S. Economy Ready for Liftoff?

    The Fed continues to delay normalizing rates, citing inflation concerns and “global economic and financial developments” in explaining its rationale.
  6. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  7. Professionals

    Will Interest Rates Rise at the Next Fed Meeting?

    Everyone wants to know what the Federal Reserve will do next, but the Fed doesn't even know what it's next move will be.
  8. Professionals

    How Retirees Should Prepare for a Rate Hike

    Janet Yellen has indicated that there will likely be a rate hike later this year. Here's how retirees should prepare.
  9. Investing

    China's Top Trading Partners

    A slowdown in China, the largest trading nation in the world, will have significant impacts on major trading partners: the U.S., Hong Kong, and Japan.
  10. Economics

    Explaining Economic Integration

    Economic integration reduces or eliminates trade barriers among nations, and coordinates monetary and fiscal policies.
  1. When do I need a letter of credit?

    A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a financial institution, ... Read Full Answer >>
  2. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  3. How can the federal reserve increase aggregate demand?

    The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates. Aggregate demand is a measure ... Read Full Answer >>
  4. How does the stock market react to changes in the Federal Funds Rate?

    The stock market reacts to changes in the federal funds rate in various ways depending on where it is in the business cycle. ... Read Full Answer >>
  5. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  6. How are NDFs (non-deliverable forwards) priced

    The price of non-deliverable forward contracts, or NDFs, is commonly based on an interest rate parity formula used to calculate ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!