Talk:Reserve currency
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[edit] Commodity prices
I don't see why this is true: This permits the issuing country to purchase the commodities at a significantly cheaper rate than other nations, which must exchange their currency with each purchase. It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others. If Germany wants to buy oil priced in dollars, it converts its money into dollars and buys it. If the Euro is high against the dollar, oil is relatively expensive for them; if the Euro is low against the dollar, oil is cheap. Can this either be backed up or removed? Thanks --Afelton 15:21, 24 January 2006 (UTC)
If the euro is high against the dollar, then one euro can buy more dollars and then more oil. But the point of the paragraph is more precisely to explain that whatever the level of a currency like the euro is, it has to be converted to buy US dollars and this operation has a cost.
For interest rates, the fact that the dollar is a reserve currency means that it is used for other purposes than trade with the US or capital investment to or from this country. Other countries demand this currency to build up reserves. As a result, a very high trade deficit for instance will impact the US dollar but much less than it would be the case for any other currency.
"This operation has a cost"
As of March 15, 2006, the bid/asked spread for exchange of Dollars to Euros (assuming large transaction size) is .0002 (Bloomberg Market Data), or .02% of the value of the transaction. I would say that the comment "oil is relatively expensive" is true, but at a .02% higher price isn't going to kill anybody's pocketbook.
"Killing the Pocketbook"
I've never studied economics formally so I may have this slightly off, But I think it works something like this...
As top currency, the US can print pieces of paper (at virtually no intrinsic cost) which China, Japan, etc. are happy to exchange for cars, clothes, oil, etc. (i.e. stuff with real intrinsic value) based on an implied promise that US Dollars will continue to be a strong currency and so the intrinsically valueless pieces of paper they have in their bank vaults will remain exchangeable for real goods at some point in the future.
Kind of like a huge credit card. The risky thing is the transition from "Top Currency" to "Not Top Currency" because with ~1.5 Trillion dollars in debt to China & Japan alone, either could wipe out the US Economy on a whim with the words "Sell US T-Notes"
Cambridgegames 20:13, 9 September 2006 (UTC)
"The Euro ... may also dominate alongside the dollar."
I reworded the previous version which had a double 'most likely' clause, but (I hope) preserved the sense of a 'dual-dominant' option. Is this a commonly accepted theory? If so, could we have a reference for it. My understanding was that Reserve Currency Status was naturally astable, so while we might stay a Dollar world, or end up in Euros, Yen or even back in Gold, it'd be unlikely for us to stay split across several currencies for very long.
Cambridgegames 20:50, 9 September 2006 (UTC)
