I just realised I don't really know; that's why I'm asking.
With the Eurozone troubles, the US dollar has been rising against the Euro. That's not so surprising. But the US dollar is rising not just against the Euro; it seems to be rising against other currencies as well, like the Canadian dollar. And gold is rising too, even against the US dollar. As Scott Sumner notes, it's looking a bit like a replay of late 2008. On a much smaller scale so far, but it's still worrying.
I can understand this at one level. In a financial crisis, there's a rush into money. And at a global level, the US dollar is the most "moneyish" of all moneys, so there's a rush into US dollars. But what does it really mean to say that the US dollar is the most "moneyish" of all monies?
Clower (teasing Patinkin): "Money buys goods and goods buy money, but goods do not buy goods". That's what makes money, understood as the medium of exchange, special. With n goods, including money, there are only n-1 markets in a monetary exchange economy. Money is traded in all n-1 markets; all the other goods are traded in one. Apples trade against money in the apple market. Bananas trade against money in the banana market. Etc. Every market is a money market. There is no market in which apples trade for bananas.
So, among moneys, what makes the US dollar special?
1.The US economy is a big proportion of the world economy. My guess is that a greater value of goods are bought and sold for US dollars than for any other single currency. And I'm talking about all transactions, not just GDP (which measures only final sales of newly-produced goods and services). Transactions of intermediate goods and services, and financial assets, count too. Plus, even outside the US, and even outside dollarised economies, my guess is that more traders will recognise and accept, at a pinch, the US dollar than any other foreign currency. The US dollar is a "bigger" money than any other money, because it buys and sells more stuff than any other money.
But I don't think that's the most important reason why the US dollar is special.
2. Is this true, and if so, in what exact sense is it true: "US dollars buy Canadian and Australian dollars, and Canadian and Australian dollars buy US dollars, but Canadian dollars do not buy Australian dollars, and Australian dollars do not buy Canadian dollars"? If this is true, and true in some useful and important sense, then the US dollar is to other moneys what the other moneys are to other goods. The US dollar is not just a bigger money; it's meta-money; it's the money's money.
In other words, if I want to sell my Canadian dollars and buy Australian dollars, do I first have to use my Canadian dollars to buy US dollars, then use those US dollars to buy Australian dollars? Because that's what seemed to happen to me in Australia once. I wanted to do a simple swap of Canadian into Australian dollars, but I think I got dinged for the buy/sell spread twice.
So, for all you guys wearing red suspenders on trading floors, or anyone else who knows more about this than me, is what I wrote above true? Please expand.
And if it's not true, in any useful and important sense, just what exactly does it mean to say that the US dollar is a "reserve currency", and why does it matter? I know that it is held as reserves by central banks around the world, but that only begs the questions: why? and so what?
I've ignored fixed exchange rates, where the US dollar is special because some countries peg their currency's exchange rate to the US dollar. That was much more important in the past in making the US dollar special; less so today. And I've ignored the role of the US dollar as medium of account -- "oil is priced in US dollars" -- because I can't see why it matters so much.
Today's dumb question.