Why the US Dollar is the Global Currency
A currency that’s accepted for trade all over the world is referred to as a global currency. There are some currencies in the world that are accepted for a lot of international transactions, such as the US dollar, yen and the euro. Reserve currency is another term that’s often used to refer to a global currency. The US dollar has emerged as the most popular currencies of them all, as per the International Monetary Fund. Almost 60% of all of the foreign exchange reserves of all prominent central banks are in the form of the US dollar, as of August 2019.
This means that the US dollar is the de facto global currency, even if it doesn’t have an official title. The euro is the next currency that comes closest to being referred to as a reserve currency, as 20% of all foreign exchange reserves of most central banks are held in the form of euro. However, the Eurozone crisis damaged its chances of becoming a world currency.
The value of the US dollar also gets a boost from the relative strength of the United States’ economy. It is the primary reason why dollar is regarded as the most powerful currency in the world. While the coronavirus pandemic has certainly affected the amount of US dollars in circulation and the currency has experienced some issues, it has still managed to retain the title of the most popular currency in the world and is still widely used in stocks trading and other forms of trading.
As far as the foreign exchange market is concerned, the US dollar is still ruling there because 90% of forex trading is done in this currency in one way or the other. Even though the dollar is one of the world’s 185 currencies that exist, most of these currencies are typically used in their own countries. It is also the currency in which 40% of the world’s debt has been issued due to which a lot of dollars are needed by foreign banks for conducting their business. The use of the dollar had become even more widespread after the financial crisis of 2008.
In 2018, the liabilities of the banks of Great Britain, France and Germany were more denominated in dollars that their respective currencies. Furthermore, banking regulations that were implemented for performing another crisis has also contributed to the scarcity of the US dollar. The strength of the dollar is the reason why governments are ready to hold the currency in their foreign exchange reserves. Governments get US dollars via international transactions and also from travelers and domestic businesses redeeming them for local currencies.
How Dollar Became the Global Currency
The dollar was kick-started into its current position through the 1944 Bretton Woods agreement. The gold standard had been followed in most countries since then. The governments promised to redeem currencies in their value for gold and the developed countries came together at Bretton Woods in New Hampshire for pegging the exchange rate of the currencies against the greenback.
The gold reserves were largest in the United States at that time and thanks to this agreement, countries agreed to back their currencies with the US dollar instead of gold. When countries began to demand gold for the dollars they had in the 1970s, President Nixon chose to separate the US dollar from gold.
China and Russia had begun demanding a new global currency in March 2009 because of the risk of dollar inflation. The Chinese renminbi became another one of the reserve currencies in the world, but it is still a fraction of the amount of dollar that’s held by the world’s central banks. Despite a continuous large deficit where spending is concerned and foreign debt worth trillions of dollars, the United States still holds the confidence and trust to pay off its obligations. Therefore, the dollar remains the strongest currency and is widely used in every trading software, platform and services, even though countries like China are trying to replace it.