What is a Dollar Shortage?

A dollar shortage occurs when a country lacks a sufficient supply of U.S. dollars (USD) to manage its international trade effectively. This occurs when a country has to pay out more U.S. dollars for its imports than the U.S. dollars it receives from its exports.

Because the U.S. dollar is the world’s most widely traded currency, many nations must hold assets in dollars to maintain a steadily growing economy and to trade effectively with other countries who use U.S. dollars.

Key Takeaways

  • A dollar shortage occurs when a country spends more U.S. dollars on imports than it receives on exports.
  • Since the USD is used to price many goods globally, and is used in many international trade transactions, a dollar shortage can limit a country's ability to grow or trade effectively.
  • Most countries try to maintain a reserve of currencies, like U.S. dollars or other major currencies, which can be used to buy imported goods, manage the country's exchange rate, pay international debts, or make international transactions or investments.

Understanding a Dollar Shortage

Dollar shortages impact global trade because as the currency of the world’s largest economy, the U.S. dollar acts as a peg for the value of other currencies. Even when two countries other than the United States engage in foreign trade, the status of the dollar as a reserve currency, with a reputation for stability, makes it widely used for pricing assets. For example, oil is typically priced in U.S. dollars, even if two countries engaged in an import/export oil deal don't use the USD as their domestic currency.

A reserve currency is a large quantity of currency maintained by central banks and other major financial institutions to be used for investments, transactions, international debt obligations, or to influence their domestic exchange rate

U.S. dollars are accumulated by a country when its balance of payments (BOP) shows it receives more dollars for exported goods compared to dollars spent on goods the nation imports. These countries are known as net exporters.

Countries are known as net importers when they do not accumulate sufficient dollars through their balance of payments. When the value of imported products and services is higher than the cost of those exported, a nation will be a net importer. If a dollar shortage becomes too severe, a country may ask for assistance from other countries or international organizations to maintain liquidity and improve its economy.

The term dollar shortage was coined after World War II when the world’s economies were struggling to recover, yet stable currencies were in short supply. Part of the U.S.-sponsored Marshall Plan that began just after the war helped European countries rebuild their economies by providing enough U.S. dollars to relieve that shortage.

Although the global economy today is not nearly as reliant on the United States for assistance, international organizations such as the International Monetary Fund may assist nations facing dollar shortages.

Real World Examples of Dollar Shortages

Shortages of U.S. dollars often begin when countries become more isolated from others, perhaps because of sanctions by other nations. These and other political issues can impact international trade and reduce demand for exported goods in exchange for dollars.

In 2017, Qatar suffered a dollar shortage when other Arab nations accused Qatari banks of supporting blacklisted terrorist groups. Although the country had already accumulated substantial financial reserves, it was forced to access more than $30 billion of those reserves to compensate for a net outflow of U.S. dollars.

In another incident, in late 2017 into early 2018, a shortage of dollars in Sudan caused that nation’s currency to weaken, which resulted in rapidly climbing prices. Bread prices doubled in a week, causing protests and riots. That led to significant political unrest in a country with an economy already subject to the disruption caused in part by new economic reform measures. At the start of 2019, the situation hadn't improved, with the Sudanese pound falling to record lows as people were willing to spend more and more pounds in order to buy the more stable USD.