Why Do Foreigners Hold US Dollars?

Readers Question: Why do foreigners often hold U.S. dollars? How does the holding of dollars by foreigners affect the welfare of American?

The Dollar still is the world’s reserve currency. With about 67% of the world’s currency reserves held in dollars.

The reason foreigners often hold US dollars

  • Historically, it has been seen as a safe, secure and strong currency.
  • Because most other people hold currency in dollars, people may think there is strength in numbers
  • Most commodities priced in US dollars. Most commodities such as oil and gold are priced in US dollars, so this gives an additional reason to hold currency in US dollars, minimising transaction costs of getting dollars to buy commodities.
  • China buys US Dollar assets to keep its currency undervalued. By keeping dollar undervalue, it makes Chinese exports more competitive and helps to boost export demand. See: Chinese currency manipulation
  • Problems in Eurozone have made US more attractive than many Euro bonds.

See: Why the US Dollar may lose its place as the world’s reserve currency.

How does the holding of dollars by foreigners affect the welfare of American? – will answer soon.