Despite pressures, US dollar remains key currency

This position has been retained despite the growing acceptance of the euro since its inception in 1999 and its encroachment on the US dollar's share in certain markets, and despite recent depreciation in the US dollar vis-a-vis its chief competitor. The 'AAA' long-term issuer credit rating on the United States of America rests on this position of the dollar as a key international currency. Without this, the US would not have such ready access to external financing; interest rates would have to rise to attract higher domestic savings; and growth would slow well below potential. The US dollar did not attain this position by accident, nor does the US maintain it simply with inertia. This dominance is based on the US economy's fundamental strength - the causality does not run in the other direction. That strength comes from the economy's size, the flexibility of labour and product markets, and--relative to other large, developed nations - the prospect for higher productivity growth and favourable investment returns over the medium term. As long as inflation is moderate and stable, financial markets sound and unfettered, and government spending efficient and sustainable, Standard & Poor's Ratings Services expects the US to continue enjoying the benefits a key currency brings and to maintain the 'AAA' rating.

Dollar Market Share
One indication of the US dollar's continued primacy is that it dominates foreign exchange trading. Most foreign exchange contracts are quoted with one leg as the US dollar. Table 1 shows the survey of foreign exchange market turnover compiled triennially by the Bank for International Settlements (BIS). The US dollar has a commanding position, peaking in 2001 at 90.3% and retrenching only modestly to 86.3% in 2007. (The figures for the surveyed currencies add to 200% [rounding error aside], as both sides of a trade are recorded.) On the other hand, with the elimination of the predecessor currencies of the euro and thus their trading, the euro's trading volume fell to 37% in 2007 versus nearly 60% for the legacy European Monetary System currencies in 1995. Third place belongs to the Japanese yen, which has seen its share slip to 16.5% in 2007 from its recorded peak of 24.1% in 1995. The British pound sterling, whose share declined slightly, to 15.0% in 2007 from 16.9% in 2004, its recorded peak, is fourth. No other currency has a 10% mark (again meaning that no other currency attains a share of one-twentieth of foreign exchange transactions).