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POLICY BRIEF 09-21

The Future of the Dollar

by Richard N. Cooper, Harvard University

The global financial and economic crisis and prospects for large and sustained budget deficits in the United States have prompted countries with massive dollar holdings such as China to consider alternatives to the US dollar. These countries realize that they would suffer losses if inflation eroded the value of the dollar securities they own. Are there feasible alternatives to the US dollar as a widely used international currency? Richard Cooper looks at possible alternatives—major currencies in use, such as the euro, the yen, the pound, or even the Chinese renminbi, and a synthetic currency such as the special drawing rights of the International Monetary Fund—and concludes that no other currency seems likely to overtake the US dollar, and it is likely to remain the dominant international currency for a long time. He notes that international use of the euro will grow, perhaps even more rapidly than that of the dollar for some years, but because of limitations on issuers and financial markets, the euro is not likely to displace the dollar. In a growing world economy, there is room for both. A deliberate international decision to create an international currency could displace the dollar, but that task would be formidably difficult. The prospective gains from such a creation would have to be sufficiently great to make governments willing to overcome the practical difficulties and to adopt the complementary policies (mainly concerning exchange rates) necessary to give a new international currency a compelling advantage over present arrangements.

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