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[A strong dollar may not be great for trade, but it’s essential to the economic survival of the US and the world. Zimbabwe and Venezuela can suffer hyper-inflation and the world barely notices, but if the dollar collapses we will enter a new Dark Ages globally.]

The alternative to an overvalued dollar is not hyperinflation. It’s a fairly valued dollar. Zimbabwe’s and Venezuela’s problems aren’t caused by their currency exchange rates. Their currency exchange rates are caused by their economic problems, which in turn are caused by nutty economic policies. Every other country (including Singapore and Switzerland*) has a strategy to punish speculators and foreign countries that try to push their currency’s value to the point of overvaluation. The US is the exception.

The principal problem is that so many countries use the US dollar as their reserve currency. That, and the fact that so many also use the dollar for trade, help to inflate the dollar’s value, which imposes real economic costs on the nation’s manufacturers and workers, by making them less competitive in world markets. This is a problem that can only be solved using capital controls**. But capital controls are also problematic in that they feed domestic asset bubbles***.

Excerpt from the Financial Times:

https://ftalphaville.ft.com/2018/09/19/1537329600000/China-s-currency-will-not-replace-the-US-dollar/
[The size of the US economy and the level of trade are not the only reasons the US dollar is the principal foreign reserve currency. The transparency of the US financial markets as well as the predictability and credibility of monetary policy reinforce the safe-haven status that the dollar holds. Unlike many other economies, the current structure of the US economy also makes it reasonably tolerant to running continuous trade deficits, which also supports our view that the US dollar is to remain the dominant foreign currency reserve for some time. The convenience and cost advantage of trading in US dollars mean that central banks would have to weigh up the outlay of shifting a sizable dollar portion into alternative currencies. In addition, the extensive proportion of US dollars in foreign reserves means that although shifts in reserve holdings do occur, it could take decades for them to accumulate into a notable shift in the US dollar’s position as the key global reserve currency.

China may have the economic heft, but its currency does not float freely, its local financial markets are not fully accessible to foreign investors and its monetary policy is far from predictable. The Party can throw up capital controls whenever it sees fit — a tactic it used between 2015 and 2016 after it stunned financial markets with an surprise 2 per cent devaluation of its currency.

Allowing market forces to play a larger role in determining the renminbi’s value and opening up the capital account would require a complete overhaul of the country’s financial system. If there was ever a good time to take on this monumental task, now does not appear to be it: Chinese officials are fending off a financial crisis as they scramble to manage an enormous domestic debt bubble.]

* https://www.moneyandbanking.com/commentary/2015/1/18/a-swiss-lesson-in-time-consistency

** https://en.wikipedia.org/wiki/Capital_control

*** https://asia.nikkei.com/Economy/China-s-capital-controls-give-bubbles-fresh-fuel