Stock Market Weekly Review

FOR decades, Latin America has been littered with one currency crisis after another.

The best way to avoid these is to dump their disaster-prone currencies and replace them with the US dollar, as Panama, Ecuador, and El Salvador have done.

Dollarisation occurs when residents of a country use a foreign currency instead of the country’s domestic currency.

The term “dollarisation” is used generically and covers all cases in which a foreign currency is used by local residents. Even though other foreign currencies, such as the euro, are sometimes used instead of local currencies, it is the US dollar that dominates; hence, the use of the term dollarisation.

There are different varieties of dollarisation. Unofficial dollarisation occurs when a country issues domestic currency but foreign currencies, or assets denominated in foreign currencies, are also used as a means of payment and/or a store of value. Data on the magnitude of total unofficial dollarisation are unavailable.

However, estimates of US. dollar notes held abroad provide a sense of the magnitude. The US Federal Reserve estimates that as much as 72 percent of all dollar notes are held abroad. Today, the stock of dollar notes outstanding is $1.99 trillion. So, as much as $1.43 trillion worth of dollar notes are held overseas. And this is just the tip of the iceberg. Indeed, that number only includes US dollar notes held overseas. If we add in all the uses of the US dollar as a unit of account and vehicle currency for the execution of foreign trade and capital transactions, a simple fact emerges: The world is unofficially highly dollarised.