Too easy.
Stability. The USD is one thing.
STABLE. You put your money in USD, it will retain value, period. The USD, doesn't falter, doesn't fail, doesn't waver. It is the standard.
In the realm of international trade, the
United States wields a unique advantage: nearly all of its imports are invoiced in
U.S. dollars. This phenomenon grants the U.S. a status of
“privileged insularity”. But how does this translate into exporting inflation?
Here’s the mechanism: When the
U.S. dollar is strong, it acts as a conduit to
“export inflation” to the rest of the global economy. Let me break it down:
- Currency Movements: The dollar’s strength significantly impacts global markets. Firms in countries with actively traded currencies often issue more than a sixth of their debt in U.S. dollars, even without any sales in the United States. A robust dollar directly affects the debt-servicing costs for these companies, especially when global financial conditions tighten, and interest rates rise.
- Emerging Markets: While emerging markets are often vulnerable when the dollar appreciates, some currencies have fared better. For instance, Brazil has reduced its dollar-denominated borrowing over time. However, the U.S. remains insulated due to its dollar-centric import structure.
- The Inflation Export: As the dollar strengthens, the U.S. can import goods and services at relatively low costs. Consequently, it effectively exports inflation to other nations. For example, consider a sushi meal in Japan: At the beginning of 2022, it cost an American visitor about $25. However, due to the dollar's appreciation against the Japanese Yen, the price dropped to around $20 by the end of October.
In summary, the U.S. leverages its currency dominance to subtly transmit inflationary pressures across borders, impacting economies worldwide.