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Reserving Judgment

Chief Economist Carl Tannenbaum addresses skepticism about the dollar.


Hi, I'm Carl Tannenbaum, Chief Economist for Northern Trust. For those of us who travel a lot, exchange rates are very important. They can mean the difference between a nice hotel and a not as nice hotel and determine whether dinner is sushi or a day-old tuna fish sandwich. At some times, in some places, even the tuna fish sandwich isn't within my budget.

I'm fortunate, though, to have the US dollar as my home currency. While it can depreciate at times, its status as the world's premier medium of exchange anchors its value. Because it is backed by the world's largest economy and the world's deepest capital markets, demand for the US dollar is usually very strong. But the dollar standing has come under question this year.

The debt ceiling debate last spring highlighted the rising level of US federal debt and the increasing cost of supporting it as interest rates rise. The challenging negotiations in the Congress during that interval highlight how difficult it will be to bring that borrowing under control. Countries with this kind of dynamic usually see their currencies depreciate as markets factor in an increased risk premium. Further, fragmentation in international trade will likely result in more regional exchanges than global ones.

This may allow some countries to strike currency compacts with one another as opposed to converting back and forth into the US dollar. This would also serve to diminish the dollar's value. There have even been questions about the dollar's position as the world's reserve currency. This designation recognizes that foreign investors up to and including foreign central banks hold substantial amounts of dollar-based assets.

The dollar presently accounts for about 60% of the reserves held around the world. Reserve status confers a number of benefits on its home market. It limits borrowing costs, creates a safe haven during times of turbulence, and offers citizens advantages in trade and travel. The US dollar is just the sixth holder of this designation over the last 600 years.

Maintaining this position requires sound economic principles and policy. One can certainly question whether the United States is doing the right things in this area. But one can also ask similar questions of other global centers. In the end, it's all relative.

At present, no other currency is in a position to topple the dollar. The euro, in second place, accounts for just 20% of the world's reserves. The Chinese renminbi is hindered by its lack of convertibility and the challenges currently facing the Chinese economy. Cryptocurrencies have been plagued by wild fluctuations in value and instability in their underlying platforms.

So when it comes to currencies, the US dollar isn't the only fish in the sea, but it's still the freshest one in the market. And that's the view from here.

Carl R. Tannenbaum

Executive Vice President and Chief Economist
Carl Tannenbaum is the Chief Economist for Northern Trust. In this role, he briefs clients and colleagues on the economy and business conditions, prepares the bank's official economic outlook and participates in forecast surveys. He is a member of Northern Trust's investment policy committee, its capital committee, and its asset/liability management committee.