Even if the US dollar's singular dominance as global currency of choice is in fact ebbing, it may not automatically lead to a weaker dollar exchange rate — and could periodically mean the opposite.
A Federal Reserve less worried about the overspill of its monetary policies to the rest of the world is a central bank more inclined to extreme tightening and easing. And a less dollarised global economy could potentially free the Fed to stay locally focused — for better or worse — and keep inflation lower over time.
The big advantage of large dollar reserve holdings alongside wide commercial usage and trade in dollars overseas was clear. US firms avoided added currency volatility in dollar-invoiced imports such as energy and commodities while Washington effectively enjoyed subsidised borrowing as other nations banked precautionary or windfall dollar savings back in Treasury bonds.
But many have also argued over the years that the dollar's international role often constrained the Fed from conducting policy most appropriate to the domestic economy — due mainly to fear that extreme moves may shock an integrated world financial system with the economic backwash hitting America's economy anyway.
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