The U.S. dollar is the world’s dominant currency and the talk of the global town.
The international community and American liberals are complaining that the dollar is too strong. The facts do not support that criticism.
Current dollar strength is affirmation of the strong foundations of the U.S. economy and U.S. institutions. The Federal Reserve is pleased because a very strong dollar weighs on inflation. Americans traveling overseas are happy that their dollars buy more euros. Obviously, a strong dollar allows U.S. companies to buy European assets at lower prices.
At the same time, the current dollar strength is a reflection of the relative economic weaknesses of European countries. The weak euro is a consequence of deeply flawed energy policies, an inherently unstable currency union — strong northern European economies competing against weak southern European economies — poor productivity growth, excessively large government, and demographic implosions. Relative to Europe, the United States enjoys multiple comparative advantages: a unified national economy, self-sufficiency in energy and agriculture, technology supremacy, and leadership in healthcare sciences. The U.S. is not experiencing a demographic crisis.
Another point of note: Europe is not importing inflation. Instead, European inflation is homegrown. It is a result of bad policy: embracing Russian President Vladimir Putin in the delusional belief that the KGB colonel would be a friend to European political interests, rejecting fracking, and believing in Big Brother government. The results are clear: The dollar is trading at multiyear highs against various freely convertible currencies, including the euro.
Of course, it also helps that the dollar is the preferred currency for cross-border transactions. In foreign exchange markets, the dollar is involved in over 90% of transactions. Foreign governments have confidence in the dollar. Central banks hold about 60% of their foreign exchange reserves in dollars, not gold or some other volatile asset class. International investors, traders, and merchants also have confidence in the dollar, the U.S. government, and U.S. institutions. This is another reminder that institutions and the rule of law matter for our prosperity, not simply the moral value of democratic accountability.
Emphasizing this consideration, the dollar is viewed globally as a “safe haven” currency. During the financial crisis of 2008-2009 and amid the economic turmoil associated with the coronavirus pandemic, investors sought dollars. In both crises, the Federal Reserve adopted extraordinary monetary policies with other central banks to provide liquidity. Global central banks have confidence that the U.S. would never adopt large-scale “beggar thy neighbor” adversarial trade policies against non-adversary governments. On the flip side, the dollar’s reserve currency status provides the U.S. with nonmilitary leverage in times of international crises. The U.S. can deny adversaries access to global liquidity.
There are some costs, however.
The dollar’s favored status as a safe haven, as a reserve currency, and as a global medium of exchange probably leads to overvaluation and recurring trade deficits. The U.S. has been running visible trade deficits for about 50 years. Typically, countries that consistently run trade deficits experience depreciating currencies. That is not the case with the dollar. In practical terms, the U.S. exports dollars, pieces of green paper, IOUs that will never return to the U.S. as claims against the U.S. Treasury Department. I have lived and worked all over the world: The dollar is good currency everywhere from Cambodia to Chad to Chile.
Conclusion?
Celebrate the strong dollar. It is irrefutable evidence of the foundational strength of this nation.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
