[murphy560]

Dr. Herbener, in today’s post-Bretton Woods world would you say that the dollar is still the “world reserve currency?” If so what exactly does it mean to be a world reserve currency in the modern economy? Does it mean that many foreign central banks hold large reserves of dollars? How about foreign commercial banks? Why do they hold these dollars?

[jmherbener]

Yes, the dollar is still a world reserve currency. Primarily, it means that foreign central banks hold dollar denominated financial assets as a reserve against the issue of their own currencies. They do so because, just like under Bretton-Woods, that’s how monetary inflation can be coordinated (or managed as our leaders like to say) for the entire world. Secondarily, it means that foreign commercial banks hold dollar denominated financial assets as reserves also. They do so because the largest capital markets in the world are denominated in dollars. Also, foreign businesses and persons hold dollar currency in conducting international trade and, in some places, as a medium of exchange superior to their domestic currencies.

Here are some statistics on foreign currency reserves:

http://www.imf.org/external/np/sta/cofer/eng/

Here are some statistics on central bank balance sheets:

http://www.yardeni.com/pub/peacockfedecbassets.pdf

Here is a Fed paper on dollar currency held overseas:

http://www.clevelandfed.org/research/commentary/1996/041596.htm

[murphy560]

Thanks as usual for the very thorough answer. I have one question regarding terminology. I’ve heard the term “dollar denominated asset” many times but I’m not exactly clear on its meaning. Does this simply mean US commercial/government stocks/bonds that can only be bought and sold in dollars and interest/dividends are paid to holders in dollars or is there more to it?

[jmherbener]

It means that the financial claim is written in dollars as opposed to euros, yen, etc.

For example, GMC issues a $10,000 bond with a coupon rate of 3 percent. Whereas, Seiko issues a
¥ 1,000,000 bond with a coupon rate of 3 percent.

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