Lael Brainard
LAEL BRAINARD is a Distinguished Fellow at the Psaros Center at Georgetown University and a Senior Fellow at Harvard Kennedy School’s Mossavar-Rahmani Center. She has served as Director of the National Economic Council, Vice Chair and Governor on the Federal Reserve Board, and Undersecretary of the U.S. Department of the Treasury.More by Lael Brainard
The U.S. dollar has dominated the global economy for more than seven decades. Roughly 90 percent of foreign exchange transactions today involve the dollar. The overwhelming share of international trade—including 74 percent in Asia and 96 percent in the Americas—is priced in U.S. dollars. Dollars account for 58 percent of central bank reserves held outside the United States. Around the world, private holdings heavily favor dollar-denominated assets.
Dollar dominance yields important benefits for the United States. It reduces price volatility in U.S. foreign trade, enables Washington to borrow expansively and at relatively low cost, and gives the U.S. government powerful tools for sanctioning its adversaries. And as the renowned economist Kenneth Rogoff convincingly argues in his highly engaging new book, Our Dollar, Your Problem, a dominant currency is incredibly difficult to displace. Inertia is a powerful force keeping the dollar on top; the strength of U.S. political and financial institutions is another. And although numerous countries have chafed against the dollar system, none have offered an alternative strong enough to overcome the dollar’s incumbency advantages. But Rogoff also warns that dollar dominance may have reached its peak, suggesting the United States will need to craft its policies with care if it is to hang on to its privileged position.
Successive U.S. administrations have adopted policies that shored up or at least avoided undermining the dollar’s dominance. They respected the independence of the Federal Reserve and the United States’ international commitments, including its role as steward of the global financial system. The Trump administration, however, is attacking the institutional foundations that underpin the dollar’s status. It is testing the bounds of executive power and receiving little pushback for doing so. It is attempting to weaken the independence of the Federal Reserve’s monetary policy authority and of the government’s official statistical agencies. And it is questioning the United States’ commitments to its allies and partners.
The Trump administration is taking these steps at the same time that it is introducing policies whose sustainability depends on maintaining the dollar’s privilege, particularly the massive spending bill President Donald Trump signed in July and which is projected to astronomically increase the U.S. national debt in the next decade. If dollar dominance erodes, Washington’s borrowing power erodes, too, and the cost of servicing its debt rises. And if a spike in interest payments on the federal debt combines with a swoon in the value of the dollar, the U.S. government could find its fiscal options constrained in ways that could inflict lasting damage on the economy.
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