The Benefits and Challenges of the U.S. Dollar as a Reserve Currency

The U.S. dollar has maintained its status as the world’s principal reserve currency since World War II, largely due to its perceived safety and liquidity. This status provides American financial institutions with significant power in global trade and finance, allowing them to dominate international transactions. However, the demand for the dollar can lead to an overvaluation of the currency, which disadvantages the manufacturing sector by making American goods more expensive relative to foreign products. Additionally, the reliance on a single reserve currency can create vulnerabilities in the U.S. economy as continuous trade deficits and an inflated financial sector can strain domestic growth.