The Dollar Is Still Central To The Global Economy. That May Not Last. : Planet Money The dollar's role in the global economy is a boon to the U.S. But in the coming years, its place in the world may slip.
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The Dollar Is Still Central To The Global Economy. That May Not Last.

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The Dollar Is Still Central To The Global Economy. That May Not Last.

The Dollar Is Still Central To The Global Economy. That May Not Last.

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Even in this time of nervousness about the U.S. economy, one thing remains steady, for now: The U.S. dollar is what's called the world's reserve currency. Companies and governments around the world stockpile lots of dollars. Which makes sense for them, because it is used in so much international trade. People another countries use the dollar even when they're trading with each other.

Robert Smith, from NPR's Planet Money team, explains a huge American advantage that is not guaranteed to last.

ROBERT SMITH: Remember the dream of Esperanto, the international language? A hundred years ago idealists hoped that it would sweep the world; that we'd all speak one language, understand each other, no more conflict. In a way, they got the concept right, but the language wrong. The world now speaks U.S. dollar.

Take Roberto Ticoulat, a businessman in Brazil.

Mr. ROBERTO TICOULAT (Coffee Exporter): I export instant coffee from Brazil all over the world, I mean more than 40 countries that we export.

SMITH: And even though he buys green coffee beans in his native currency, the real, he sells the instant coffee powder he makes for dollars even to places far from the U.S.

Mr. TICOULAT: Singapore, Malaysia, Uruguay, Russia, Kazakhstan, Turkmenistan, the majority of our trade is in dollars.

SMITH: So just to get a sip of Roberto's coffee, a Uruguayan businessman, say, has to convert his pesos into dollars, then buy the instant coffee from Roberto. And then Roberto has to change those dollars into Brazilian currency so he can spend them.

And remember, these two countries are neighbors. Why is the U.S.A. butting its currency into this whole transaction? Well, it turns out it's just easier that way.

Jonny Mears is a South African who buys lighting components from China. Once again, they won't take the South African rand. He has to use dollars.

Mr. JONNY MEARS (South African Businessman): Maybe because it's a common frame of reference for everyone. Me, being a South African, I know where the rand stands relative to the dollar. You know, if you're from Britain I guess you know where the pound stands relative to the dollar. Everyone needs a common reference point.

SMITH: It's like how if you're riding Delta airlines, your flight gets routed through Atlanta, even if you don't want to go there. The dollar is the hub of world trade. And though Mears wishes he could get a direct currency flight between South Africa and China, it's not going to happen.

Now here's where it gets good, for the Unites States at least. Economist Barry Eichengreen from U Cal Berkeley says that the U.S. gets a huge benefit from being a world currency. We don't have to pay currency exchange fees for most of our trade and the other countries do. That's an instant competitive advantage. And the demand for all those dollars means that foreign governments have to hold massive amounts of U.S. currency, which they then invest back in our Treasury bonds.

EICHENGREEN: U.S. interest rates are lower than they would be otherwise because foreign central banks and governments find it convenient to hold our treasury bonds, our debt instruments, and they lend to us more freely than they would otherwise.

SMITH: Professor Eichengreen says this ends up being worth hundreds of billions of dollars a year to the U.S. economy. The bad news for Americans is that Eichengreen doesn't think it's going to last forever. If I had done this report 100 years ago, on a wax cylinder or something, I would have been talking about how everyone in the world uses the British pound for trade. All it took was a couple of world wars, and voila, the age of the U.S. dollar. But now, Eichengreen says, people are sticking with the dollar, not because it's awesome, but because it is somewhat better than the competition.

Foreign central banks wake up one morning and say uh-oh, U.S. debt isn't as safe as we thought, where do they go?

SMITH: To the euro, which is looking mighty sickly these days? Or to Chinese currency, the renminbi, which doesn't even move freely in and out of the country? The answer is - this week at least - the world is sticking by the U.S. dollar. But tomorrow, that could change. Eichengreen says with all the new technology, maybe the world can handle more than one reference point these days.

EICHENGREEN: Everybody now can look at their smart phone and figure out what the price of a euro or a Chinese renminbi is in terms of dollars.

SMITH: And if the U.S. dollar stumbles, it could be awfully tempting for the world to switch.

Robert Smith, NPR News, New York.

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