Role as international anchor beginning to falter, as emerging markets are frustrated by Fed's near-zero interest-rate policy

Since the end of World War II, the US dollar has been used to invoice most global trade, serving as the intermediary currency for clearing international payments among banks and dominating official foreign-exchange reserves. This arrangement has often been criticized, but is there any viable alternative?

The problem for post-WWII Europe, mired in depression and inflation, was that it lacked foreign reserves, which meant that trade carried a high opportunity cost. To facilitate trade without requiring payment after each transaction, the Organization for European Economic Cooperation created the European Payments Union in 1950. Supported by a dollar-denominated line of credit, the EPU's 15 Western European member states established exact dollar exchange-rate parities as a prelude to anchoring their domestic price levels and removing all currency restrictions on intra-European trade. This formed the keystone of the hugely successful European Recovery Program (the Marshall Plan), through which the US helped to rebuild Europe's economies.

Today, most developing economies, with the exception of a few Eastern European countries, still choose to anchor their domestic macroeconomic arrangements by stabilizing their exchange rates against the dollar, at least intermittently. Meanwhile, to avoid exchange-rate conflict, the US Federal Reserve typically stays out of the currency markets.

But the dollar's role as international anchor is beginning to falter, as emerging markets everywhere grow increasingly frustrated by the Fed's near-zero interest-rate policy, which has caused a flood of "hot" capital inflows from the United States. That, in turn, has fueled sharp exchange-rate appreciation and a loss of international competitiveness - unless the affected central banks intervene to buy dollars.

Indeed, since late 2003, when the Fed first cut interest rates to 1 percent, triggering the US housing bubble, dollar reserves in emerging markets have increased six-fold, reaching $7 trillion by 2011. The resulting expansion in emerging markets' monetary base has led to much higher inflation in these countries than in the US, and to global commodity-price bubbles, particularly for oil and staple foods.

But the US is also unhappy with the way the dollar standard is functioning. Whereas other countries can choose to intervene in order to stabilize their exchange rates with the world's principal reserve currency, the US, in order to maintain consistency in rate setting, does not have the option to intervene, and lacks its own exchange-rate policy.

Moreover, the US protests against other countries' exchange-rate policies. Two decades ago, the US pressed the Japanese to allow the yen to strengthen against the dollar, claiming that Japan's unfair exchange-rate policies were responsible for the US' ballooning bilateral trade deficit. Likewise, today's "China-bashing" in the US - which has intensified as China's contribution to the US' trade deficit has soared - is intended to force the Chinese authorities to allow faster renminbi appreciation.