A global currency is known as the currency that is accepted for trade throughout the world. Most popular world’s currencies which are accepted for most international transactions are the U.S. dollar, the euro and the yen. As per the International Monetary Fund, the currency U.S. dollar is the most popular in the world.
The dollar is known as the U.S. dollar and the world’s reserve currency as well. It is actually the official currency of the United States and its territories and also use by some countries as their official currency too.
Today, more than $1.8 trillion of U.S. currency is in circulation around the world. The dollar is the de facto global currency which means that it is kept by many governments in reserves and people and companies trust it for international trade. The U.S dollar was not even affected by the turmoil when the coronavirus pandemic wreaked havoc across global markets which in turn wiped out trillions of dollars’ worth assets.
The dollar is powerful because of the U.S. economy and the safety of the dollar globally people want to hold on to. During uncertainties, investors always flee to the safest havens which is that investments expected to hold their value even during market turbulence and the U.S. dollar is exactly that because it comes from the world’s largest economy, that is the United States, which is most stable, politically and economically too. For a time, the U.S. dollar’s value may fluctuate but it will surely not plunge the way Turkish Lira or Argentinian Peso have had.
The value of the dollar is supported by the strength of the U.S. economy and it is the main reason the dollar is most powerful currency in the world. During 2018, the United States had $1,671 billion in circulation and as much as half that value is estimated to be in circulation abroad. The U.S. dollar rules in foreign exchange market too, involving into around 90% of forex trading.
There are around 185 of the world’s currencies according to the International Standards Organization List and the dollar is just one of them. Any one of these currencies could replace the dollar but it couldn’t because most of these currencies are not widely traded and they are used only inside their own countries.
As of 2008 financial crisis, it became evident that almost 40% of the world’s debt is issued in dollars and hence, banks across the globe needs a lot of dollars to conduct business. Banks which are Non-American had $27 trillion in international liabilities denominated in foreign currencies and from that, $18 trillion was in U.S. dollars. Hence, the U.S. Federal Reserve had to increase its dollar swap line and that was the only way to keep the world’s banks from running out of dollars. After this financial crisis, the dollar was made even more widely used.
During 2018, the banks of France, Germany and Great Britain has held more liabilities denominated in dollars than in their own currencies. With this, the bank regulations enacted to prevent another crisis have made the dollars go in scarce and the Federal Reserve has increased the fed funds rate which decreases the money supply by making dollars more expensive to borrow. The strength of the U.S. dollar is the main reason the governments are always willing to hold this currency in their foreign exchange reserves as they acquire currencies from their international transactions and also from travelers and domestic businesses who redeem them for local currencies.
The 1944 Bretton Woods agreement kickstarted this all making the dollar grow into its current position. Before that, most of the countries were on the gold standards. Governments of these countries upon demand promised to redeem their currencies for their value in gold. By then, as the world’s developed countries met at Bretton Woods to come forward for the exchange rate for all currencies to the U.S. dollar, the U.S held the largest gold reserves at that time. After that, the agreement allowed other countries to take back their currencies with dollars rather than gold.
The power of the U.S. dollar will always lie in its use as a global currency and also the fact that it is backed by the power of U.S. economy.
There are other reasons too, which made the dollar most powerful currency. Among them few are, in today’s world the 80% of world trading takes place in dollars and about 39% of the world’s loans are given and paid in US dollars and 65% of dollar supply is used outside the country. Surprisingly, most trading countries of the world accept payment in dollars only and that’s why foreign banks need dollars to participate in international trade.
There are 189 members in the IMF and the rule of the IMF says that every member country has to deposit a certain percentage of their quota in the US dollars, this in turn ultimately increases the demand of the dollar internationally.
If two Non-American countries are trading with each other, they prefer to use U.S. dollars in payment because they know that if they use dollars, they can import goods from any other country at any given time.
Another reason for the power of dollars is that the value of U.S. dollar doesn’t fluctuate often and that is the why every country of the world accept dollar without any hesitation.
The United States has the world’s biggest economy due to which it provides many poorer countries in the US dollar and receives the repayment in the same currency. For this reason, the demand of dollar in the international market exists high throughout the year.
The United States of America still holds global trust and confidence in its ability to pay its obligations despite trillions of dollars being in foreign debt and continuous large deficit spending. Hence, the U.S. dollar remains the most powerful world currency and it may continue to be the top global currency in the years to come.