“LUMPY, unpredictable, potentially large”: that was how Tim Geithner, then head of the New York Federal Reserve, described the need for dollars in emerging economies in the dark days of October 2008, according to transcripts of a Fed meeting released last month. To help smooth out those lumps, the Fed offered to “swap” currencies with four favoured central banks, as far off as South Korea and Singapore. They could exchange their own money for dollars at the prevailing exchange rate (on condition that they later swap them back again at the same rate). Why did the Fed decide to reach so far beyond its shores? It worried that stress in a financially connected emerging economy could eventually hurt America. But Mr Geithner also hinted at another motive. “The privilege of being the reserve currency of the world comes with some burdens,” he said.
That privilege is the subject of a new book, “The Dollar Trap”, by Eswar Prasad of Cornell University, who shares the world’s ambivalence towards the currency. The 2008 financial crisis might have been expected to erode the dollar’s global prominence. Instead, he argues, it cemented it. America’s fragility was, paradoxically, a source of strength for its currency.
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