U.S. Dollar Maintains Dominant Share of Global Currency Reserves

The United States has maintained the world's primary reserve currency for nearly a century. This status has enabled the country to finance the world's largest military, two-thirds of the developed world's medical research and development, space exploration programs, nearly half of global humanitarian aid, and extensive domestic social spending.

The arrangements persist even as the national debt-to-GDP ratio stands at 100 percent and annual net interest costs on the federal debt now exceed spending on the entire Pentagon. The dollar's position dates to the period after World War I. While other Western nations accumulated debt, the United States emerged as the world's largest creditor nation.

The dollar rose from 0 percent to nearly a quarter of global foreign currency reserves in the first two decades of the 20th century through bond markets, gold convertibility and equity markets. An international conference in 1944 formalized the system by tying other currencies to the dollar, which in turn was linked to gold.

The dollar's share of global reserves has declined from nearly 70 percent at the start of the century. It still comprises nearly 57 percent of foreign exchange reserves and the vast majority of international banking transactions recorded by SWIFT.

1971 the gold convertibility of the dollar ended. The change followed large domestic spending programs in the 1960s. Global financial systems continued to rely on the dollar, reinforced by its role in oil trade. Later efforts to promote alternative currencies faced setbacks after regional conflicts disrupted those plans.

A recent proposal that the United States relinquish aspects of its reserve currency role was reversed after Treasury yields rose and bond markets reacted negatively. Officials determined that sustaining a national debt of $38 trillion requires persistent capital inflows that a trade deficit helps facilitate.

The relative decline in the dollar's reserve share has coincided with higher Treasury yields.

The Committee for a Responsible Federal Budget reported that a one-percentage-point rise in the 10-year Treasury yield over the next decade would add $3.5 trillion to the national debt by 2036. Availability of the currency and the U.S. trade deficit are expected to remain supportive factors.

Stability and economic growth will require policy measures that avoid hindering organic expansion or eroding the currency's value. As long as the currency remains steady, the arrangement provides what economists have termed an exorbitant privilege to the United States.