These Totally Unexpected Consequences of U.S. Dollar Dominance – Zimo News

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In 1971, Richard Nixon’s Treasury Secretary John Connery told his counterparts in other major economies: “The dollar is our currency, but your problem. The background – the slow decline of the Bretton Woods monetary system – is ancient history.

But it’s worth noting that, after all these years, the formula still holds true. I say “amazing” because the US no longer dominates the world economy as it once did. In 1960, they accounted for about 40 percent of world GDP; today they account for less than a quarter.

In addition, two other currencies—the euro and the yuan—now serve an economy the size of the United States. However, the US dollar still dominates the international financial market. When emerging market economies borrow abroad, their debt is still denominated in dollars. The financial dominance of the US dollar appears to have given the US exchange rate (see page 12)—the value of the dollar relative to other currencies—of enormous importance in the world economy. A recent paper by Maurice Obstfeld and Haonan Zhou asserts that there is a global “dollar cycle”; when the dollar strengthens, it puts financial and economic stress on the rest of the world. The U.S. dollar has been very strong lately.

When the dollar strengthens, it creates financial and economic stress in the rest of the world.

This strength of the dollar hides three big mysteries. The first, and least complicated, breakthrough is that it still dominates while the U.S. economy has lost its dominance. The second, more puzzling question is why dollar volatility has such a global impact. Finally, it is necessary to understand why the dollar has appreciated so much in recent times.

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