I saw a FT article last year about how the Euro seemed to be replacing the US Dollar as the global currency. Unfortunately, I seem to have lost it.

Nevertheless, I remember that it was a good enough that it has stuck with me all this time. I’ll probably try to find it again at some point and if I do, I’ll update this post with the link.

At the time, it occurred to me that it was one of these obvious things that should have come up on my radar. The article had this list of variables that it looked at, which worked as a yardtick of the status of USD as the global currency of the world.

Note that the issue is not trivial. It is not just a curiosity that tickels my mind. It is something that should be at the forefront of anyone even interested in the state of the world. For me, it is a yardstick of global economic and geopolitical paradigm stability/shift. Having the monopoly of the global currency of the world was one of the hallmarks of the Persian empire, of the Roman Empire, of the Abbasid Caliphate, of the Carolingian Empire, of Venice and Florence, Byzantium, the Spanish Empire, of the British Empire and now of the USA.

Unable to find that article, I am now left to figure it out on my own. So, now that I think about what they may have been, I am taken back to the definition of what a money is supposed to do in order to be successful:

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1.   A unit of Account – This means that currency is something which we use to measure value. The easier it is to measure that value, the better the currency is. This is why most currencies have switched to the metric system. Another way to think about it is as the St Louis Fed, currency is also as the item we use to enumerate how many of something else is worth. “You can think of money as a yardstick-the device we use to measure value in economic transactions. If you are shopping for a new computer, the price could be quoted in terms of t-shirts, bicycles, or corn. So, for instance, your new computer might cost you 100 to 150 bushels of corn at today’s prices, but you would find it most helpful if the price were set in terms of money because it is a common measure of value across the economy.” In this sense, the more people are willing to accept something as a means to count other things, then it is a good money.

2.    A store of Value – If the value of a good in a currency changes a lot, the currency is a less store of value, as the worth of the currency fluctuates wildly. This is why stable inflation and exchange
rates matter.

3.    A means of Exchange – If people are willing to count and hold on to a currency and then to use it to buy and
sell things, then that currency is good.

Looking at the above, should give you a good notion of the things wants to look at when deciding what the dominant currency of the world is. If most goods are quoted in a specific currency, if that currency is more stable than the rest and if it is used more for transactions than the rest, then that is the dominant currency of the world. In a sense, the best way to think of the above is to consider that money is flow and stock. The currency that flows the most and the currency that is most stocked is the global currency of the world.

As a general reference, data from the Bank of International Settlements (BIS) is probably a good reference. To simplify things and to be clearer, I’m going to use the aforementioned structure:

Money as a flow

Financial Transations

Primary markets: IPOs and Bond issuance

Secondary markets: OTC Trading and Exchange Trading – Equities, Bonds, Derivatives, Commodities.

Commerce: This data set from an IMF Article about global invoicing might also be interesting as a proxy for trading.

Monetary transfer: Data from Swift, which monitors global transactions.

Money as a stock

Savings: Global CB reserves per currency, is probably a good gauge of savings preferences. See for that the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER).

Market Capitalization – Equities (remember that every stock market is denominated in domestic currency)

Debt: This IMF Database is interesting, as is this WB Database, this BIS dataset and this OECD data. However, none seems to have currency distributions. For currency distributions of sovereign debt check here and here. There might also be something in this joint project here. In another note, here’s an interesting discussion of sovereign debt risk vis-à-vis currency denomination.

I think another things that might be useful to add on top of this, is the insights of Optimal Currency Area theory. Clearly, no one fulfils those criteria perfectly, but whichever does best, ought to be the preferred currency, when the aforementioned characteristics are fulfilled:

1. Labor mobility across the members
2. Openness with capital mobility and price and wage flexibility across the members
3. Automatic fiscal stabilisers across the members
4. Business cycles alignment across the members

This then can also send one on a rabbit hole of other variables, such as those associated with fiscal expenditure, i.e.: military expenditure (SIRPI is the go-to place for this).

Anyway, as it stands, the USA is clearly the dominant currency. Also, the world using the US Dollar as its global currency is a very suboptimal state of affairs given the lack of integration between the USA and the rest of the world (although more so for 1 and 3 than 2 and 4). Also, the outclasses everyone militarily. So, for now, none of this looks to be changing anytime soon.

Another thing that would be interesting to check would be how the change occurred in the usage of dominant currencies in the past. How long did it take the world to go from Sterling to greenback, etc?

Here are some sources:

Global Financial Data discussion

Schenk 2009, The Retirement of Sterling as a Reserve Currency after 1945: Lessons for the US Dollar?

Eichengreen 2005, Sterling’s Past, Dollar’s Future: Historical Perspectives on Reserve Currency Competition

Eichengreen 2008, Globalizing Capital: A History of the International Monetary System (review)

This is abt debt:

Abbas et al 2014, Sovereign Debt Composition in Advanced
Economies: A Historical Perspective