No Comments

Why is the US Dollar World’s Dominant Reserve Currency?

US Dollar World’s Dominant Reserve Currency

The Dominant Currency

A dominant currency is a single currency that is used by all countries around the world. This would replace all other national currencies and would be the only currency used for international trade and transactions. The future of world currency is uncertain. Some experts believe that the US dollar will remain the dominant world currency, while others believe that the Euro will eventually replace the dollar.

The United States dollar is the strongest currency on the planet. This means that central banks around the globe hold reserves of USD to help stabilize their currencies. People prefer trading USD as compared to other currencies. It is bought and sold more than any other currency on the foreign exchange market. Plus, the widely used currency for international transactions is the American dollar.

Additionally, it is used more than any other currency to buy goods and services from other countries. The USD is also the most stable currency in the world. This means that it stays the same value as other currencies. Finally, the USD is the most trusted currency in the world. People worldwide have faith in the USD and are more likely to use it than any other currency.

The reason behind the strength of the US dollar worldwide

The common reason behind the power and strength of the US dollar is the relative strength that supports it. In the world exchange market, the USD is ruled and around 90% of the FX trading involves the American dollar. 

The dollar is an ordinary currency as the other country’s banknotes, but the fact is that the USD is used in every other country in the world. The simple reason behind this is that the U.S dollar can be easily bought and sold in almost every market in the world, making it the most accessible currency for international transactions. Including that, 40% of the world’s debt is paid and given in dollars. This statement clarifies that foreign banks need dollars to drive their business. However, this also has a shred of evidence. During the 2008 financial crisis, non-American banks had $27 trillion in multinational liabilities denominated in foreign currencies. Of that $27 trillion, $18 trillion was in US dollars. For that, the increase of the dollar swap line was the only way to prevent the banks from running out of dollars. 

Because of the 2008’s financial crisis, the dollars started being used in a broad spectrum. The banks of  France, Germany, and Great Britain held had more liabilities denominated in dollars instead of in their Euros or Pounds in 2018. Banks are also limited in their ability to unload too many dollar-denominated assets as more and more regulation is put in place. This could be risky for your business if the Fed starts increasing rates. That decreases the supply of money by making dollars more hard and expensive to borrow. 

Foreign Trade

Governments are willing to hold the dollar in their foreign exchange reserves because of its stability. They acquire currencies from their international transactions. Some governments have been investing their reserves in foreign currencies. China and Japan have been buying up the USA’s currencies to various degrees in recent years. China is the United States’ largest export partner while Japan is the United States’ 4th largest export partner, after Mexico and Canada.

To ensure that the products they export are affordable, they try to keep their currencies at a lower level.

Why the US Dollar is known as the Global currency?

The Bretton Woods agreement in 1944 started the US dollar off on a healthy ascent and it has been gaining strength ever since. Most countries were on the gold standard before then. The government assured citizens that gold will be redeemed for money with its value intact. It is at the Bretton Woods conference in New Hampshire that members of the World’s specialist commercial nations got together to peg the exchange ratio of all currencies to the US dollar. During this time, the United States held the largest gold reserves. In the Bretton Woods Agreement of 1944, other countries could back their currencies with American dollars rather than gold in order to foster international trade.

Many countries started demanding gold for the dollars they held by the time the early 1970s. They needed to prevent high inflation. Rather than let Fort Knox run out of money and thus weaken the dollar, in 1971, the President simultaneously took the US off of the gold standard.

The only World currency

China and Russia reached together in March 2009 with a plan for a new form of multinational currency, which they wanted to “disconnect” from individual countries. Plus, it also has lower systemic risk than most credit-based national currencies – and is able to maintain stability in the long run, which means we’re less likely to face any inherent deficiencies or disadvantages. 

China was worried that if dollar inflation hits, the trillions it held in US dollars will be worthless. This will happen as a result of increased U.S debt and a corresponding increase in printing money. For that reason, China called the International Monetary Fund (IMF) to build a new currency that could replace the dollar.

The Chinese renminbi was added to the list of leading world currencies in the final quarter of 2016. According to the IMF, as of January 2020, the world’s central banks held $221 billion worth. That’s a fraction of the $6.8 trillion dollars currently in circulation but it will continue to grow in the future.

China is working to make its currency more accessible in the global marketplace, in other words, China wants to replace the Dollar with Yuan. To make such a thing possible, China is taking steps to do so by reforming its economy.

Wrapping Up

A world currency is a currency that is accepted for trade by countries around the world. The most common world currency is the U.S dollar. Other world currencies include the Euro, the Japanese Yen, and the British Pound. However, The dollar’s dominance is also declining. Countries and banks from Russia, China, and a few others think we should move to a new one-world currency that isn’t backed by any particular country.

The drawbacks of having a world currency include the loss of national sovereignty, inflation, and the risk of global economic collapse. The future of world currency is uncertain. Some experts believe that the US dollar will remain the dominant world currency, while others believe that the Euro, Ruble, or Yuan will eventually replace the Dollar.

You might also like
Tags: , ,

More Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.
You need to agree with the terms to proceed