Why the US Dollar is the World Currency?

World currencies are currencies that can trade around the world. Some of the world’s currencies are accepted in most international transactions. The most popular are the US dollar, euro, and yen. Another name for World currency is reserve currency.

What is world’s currency?

According to the International Monetary Fund, the US dollar is the most popular. As of the fourth quarter of 2019, it accounts for more than 60% of all known central bank foreign exchange reserves. It makes it a de facto world currency, even if it doesn’t have an official title.

The next closest reserve currency is the euro. It accounts for 20% of the known central bank’s foreign exchange reserves. The eurozone crisis has undermined the potential of the euro to become a World currency. It revealed the difficulty of a monetary union guided by separate political entities.

US dollar as world’s currency:

The relative strength of the US economy underpins the value of the dollar. That is why the dollar is the most powerful currency. As of 2018, the US circulation was $ 1.67 trillion. It is estimated that half of its value is distributed overseas. Many of these bills are in the former Soviet Union countries and Latin America. They are often used as hard currencies in everyday transactions.

In the foreign exchange market, the dollar dominates. About 90% of forex trading is related to the US dollar. The dollar is only one of the 185 currencies in the world, according to the International Organization for Standardization list, but most of these currencies are used only in their own country.

About 40% of the world’s debt is issued in dollars. As a result, foreign banks need a lot of dollars to do business. This became apparent during the 2008 financial crisis, non-American banks had $ 27 trillion in foreign currency-denominated international debt. Of that, $ 18 trillion was the US dollar. As a result, the Federal Reserve Board needed to increase the dollar swap line. That was the only way to keep the world’s banks from running out of dollars.

The financial crisis has made the dollar more widely used. In 2018, German, French, and British banks held more dollar-denominated debt than their own currencies. In addition, banking regulations enacted to prevent another crisis have run short of the dollar, and the Federal Reserve has raised the federal funds rate. It reduces the money supply by making it more expensive to borrow dollars.

The strength of the dollar is the reason why the government is willing to hold the dollar in its foreign exchange reserves. The government acquires currency from international transactions. You will also receive it from domestic businesses and travelers who exchange for local currency.

Some governments invest reserves in foreign currencies. China and Japan deliberately purchase the currencies of their major export partners. The United States is China’s largest export partner and Japan’s second-largest, trying to make export prices cheaper by comparing currencies to make them competitive.

Why US dollar is the choice of everyone?

Stability is one of the main reasons describing why many countries are accepting the US dollar as their official currency. The US dollar has been deliberately devalued only once as part of Roosevelt’s gold policy, and its notes will not be invalidated. For countries familiar with bank failures, devaluations, and inflation, the stability of the US dollar provides some relief. Using a stable currency makes business easier.

Due to the prevalence of informal dollarization in some countries, there are more US currencies in circulation than local currencies. When this happens, it can be difficult to undo. Ironically, the enormous stability that dollarization brings can be a curse for local governments as they lose control over inflation and fiscal policy. But for many, the curse of the government is a blessing to others.

According to a research report, 40% and 60% of the existing US dollar is distributed outside the United States. This estimate is supported by the actions of the US federal agency, which created posters and brochures in 24 languages to highlight the new look and anti-counterfeiting features of updated invoices created between 2003 and 2006.

What if it’s not the dollar?

Over the years, most of those “pillars” that made the dollar king of the post-war economy have been overthrown, says Kirschner. The recession, the stock market bubble, and the global financial crisis have cracked the US financial model, causing the US to lose some of its political advantage and many governments and companies to trade with China and Europe instead.

Still, the numbers show that the dollar is still the currency that countries and individuals rely on as a “safe harbor” during economic storms.

“The ultimate reason is simple, there is no credible alternative. What if it’s not the dollar?” (Kirschner)