The Privilege and Burden of the Reserve Currency — Why Is the Dollar Special
More than half of all the foreign exchange stockpiled by the world's central banks is U.S. dollars. Why does the world want American money this much? What burden comes with that 'privilege'?
What is a reserve currency?
A reserve currency is a currency that countries around the world use as the standard for trade settlement, foreign reserves, and international finance. Today its center is unquestionably the U.S. dollar.
How overwhelming is it? According to the IMF's foreign-reserves statistics (COFER), the U.S. dollar's share of allocated world foreign reserves is around 58%. It was 58.2% in Q2 2024 and 57.4% in Q3, and it has since hovered in the high 57% range.
The euro, yen, pound, yuan, and others divide up the rest. In other words, more than half of the money the world stockpiles for emergencies is dollars.
Source: IMF Data Brief (COFER), St. Louis Fed 'The U.S. Dollar's Role as a Reserve Currency.' The share fluctuates slightly each quarter, so it is shown as 'about 58%.'
Why it is called an 'exorbitant privilege'
That the world wants dollars gives the U.S. an enormous advantage. It is famous that a French finance minister in the 1960s called this an 'exorbitant privilege.'
First, the U.S. can borrow in its own currency (the dollar). Most countries take on debt in dollars, but the U.S. is the country that prints dollars, so it is relatively free of exchange-rate risk.
Second, because the world keeps buying U.S. Treasuries as a safe asset, the U.S. can raise enormous funds at low interest rates.
Third, when a crisis comes, money actually rushes into the dollar (the safe-haven effect), so the U.S. enjoys the paradoxical advantage that fundraising becomes easier during a crisis.
The privilege carries a burden too
Reserve-currency status is not only a free lunch. There is a long-standing problem called the 'Triffin dilemma.'
To supply enough dollars for the world to use, the U.S. must keep sending dollars abroad. This means the U.S. must accept a chronic current account deficit. But if the deficit grows too large, paradoxically, trust in the dollar can waver. It is a dilemma in which supplying the world with dollars and preserving the dollar's credibility conflict with each other.
Also, a reserve-currency country's currency tends to stay strong due to safe-asset demand, which burdens its own export industry.
In short, the reserve currency grants the privileges of cheap fundraising and crisis-defense strength, but it comes bundled with the burdens of chronic deficits and a strong currency. No one can definitively say which currency will replace the dollar in the future, and this article makes no such prediction.
This article is educational material explaining the structure of the reserve currency and does not predict the future value or investment direction of any particular currency.
常见问题
Q. Will the yuan or euro replace the dollar as the reserve currency?
It is hard to predict, and this article makes no definitive claim. The euro, yen, pound, and yuan hold some share, but the dollar is still overwhelmingly dominant at about 58%. Reserve-currency status is built up over a long time from not just economic size but also the depth of financial markets, the rule of law and trust, and free capital movement, so the general view is that it is not easy to change in a short time.
Q. Does the dollar's reserve-currency status matter to Korean investors?
Yes. Because the dollar is both a safe-haven currency that strengthens in a crisis and the reserve currency, dollar assets show a different crisis response than won assets. So there is something to reference from a currency-diversification perspective. However, this is a general characteristic explanation and not a recommendation to buy any particular currency or asset.
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📋 结果基于历史数据计算,过去的收益不代表未来的收益。
📋 本服务旨在帮助理解投资、供教育之用,并非投资建议。