Beggar Thy Neighbour

15 Oct 2014 13:54 BST · Time Estimate: 1 minute ·

Roughly 60% of international central bank reserves is made up of United States Dollars; it is the world’s most prominent reserve currency. It’s no secret that many countries suppress the value of their own currency relative to the dollar to raise exports to, and reduce imports from, the US. Countries like China and South Korea buy many dollars in order to keep this happy equation balanced as favourably as possible.

Historic Forex Intervention

Example of previous intervention - Morgan Stanley et al.

Nothing new there then. But while the US has always been a more-than-willing participant in keeping the greenback as the global currency, latest research suggests the desire to maintain this lofty status is suppressing jobs and growth and inflating trade deficits. There is a strongly held view – notably echoed by economist Kenneth Austin in The Journal of Post Keynesian Economic – that the US government needs to stop efforts to maintain the dollar’s reserve-currency status and get the nation’s economy back on track.

Removing the USD from this position of ‘burden’, as some observers refer to it, would be relatively straightforward; America simply has to prevent other nations from accumulating too many dollar bills. This strategy has polarized many views across America, with some, horrified at the prospect of a ‘cheapened’ dollar, arguing that any plan to devalue currency in order to offer cheaper, more competitive exports is a trade model that loses sight of the relationship between a strong currency and prosperity. Others merely state that US policy doesn’t make the USD a reserve currency; it’s down to external demand for dollars and therefore out of the government’s control.

As the trade deficit continues to peak above the 400bn USD mark, the question of whether or not to strip the USD of its reserve-currency crown is most definitely in play and how things progress from here represents a watching brief for the forex market.