The wide presence of the U.S. in international trade and finances is often associated with the dominant role of the U.S. dollar in the currency market. Furthermore, the Federal Reserve’s monetary policy supports the dollar’s strength by gradually increasing interest rates in response to inflation. The current political tensions in U.S. trade relationships with China initiated by president Trump impose risks to the national debt, where China owns a more significant portion (Balaam & Dilman, 2019, p. 214). However, the findings suggest that the dollar’s dominant position in the global economy is unlikely to change in the nearest future. The following reflection paper will summarize how the dollar stabilizes the global economy and explore possible risks in dollar appreciation.
Firstly, the opinion that the U.S. dollar’s status provides privilege to the country’s economy is associated with its higher flexibility compared to the gold standard. However, the U.S. currency passed the test of time in combining the factors of stability, liquidity, safety and help as a long-term reserve currency, providing favorable conditions for the international political economy (Bernanke, 2016). Thus, the sole source of influence of the U.S. on the global economy is Fed’s dollar policy. While the situation implies minor risks to the global economy through dollar borrowers, these risks can be effectively monitored and prevented through banking systems.
Furthermore, considering the question of the dollar not being tied to the gold standard, the public mistakenly perceives it as an unfair advantage to the U.S. However, in his article Bernanke (2016) explains that the privilege of currency issuing is symbolic as there are many other competitive currencies, such as the euro, yen, or renminbi. Moreover, the author argues that the dollar’s seigniorage presents only a small part of the U.S. GDP to be considered as a significant advantage.
In conclusion, this essay summarized public misconceptions about U.S. dominance over the global currency market. Thus, the summary addressed public concerns about U.S. privilege by explaining its minor advantages to the American economy. On the other hand, the paper emphasized the important role of the U.S. dollar in maintaining the stability of the national and global economy. Lastly, the essay explained that risks imposed by Fed’s increased interest rates for dollar borrowers can be monitored through banking systems.
Reference
Balaam, D., & Dillman, B. (2019) Introduction to international political economy (7th ed.). (Routledge).
Bernanke, B. S. (2016). The dollar’s international role: An ‘exorbitant privilege’? Brookings. Web.