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Comment by simonh | Hacker News Reader

This is missing a huge piece of the puzzle. US Treasuries. Any excess dollars are simply used to buy T-Notes, lowering the US government’s borrowing costs and anchoring the US economy. There is simply no need to go hunting for someone to buy your dollars all the time when you can always go to the US government itself.

The US special role is based on two things, size and stability. Everything else is icing.

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US Treasuries pay in dollars. Buying a Treasury is a bet that dollars will still be valuable in the future. Am I wrong to see the high value (low interest rate) of Treasuries as a consequence of the value of the dollar, not a cause? If people lose faith that the dollar will hold its value, the fact that the US government is willing to pay 1% interest in dollar loans will not help bolster confidence.

Foreign central banks don’t really care so much about making or losing money on their dollar treasuries. They’re not currency speculators. They care much more about stabilising their currency and economy with respect to the global economy.

I don’t think you can un-pick dollar stability from its desirability. The value of fiat currencies is based solely on confidence, nothing else. You simply can’t say a currency is stable because people are confident in it, or that they are confident in it because it is stable. They are both different ways of saying the same thing. We measure confidence in a currency by analysing how stable it is in the market.

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