How the U.S. Dollar Became the Global Currency?

 

Global currency is the one that is used for trading throughout the world. Currently, US Dollar is considered to be the most powerful currency on the planet and is accepted as the global currency throughout the world for trading. Other popular world currencies other than US Dollar are Euro and Yen but they failed to gain the global acceptance which makes the US dollar undefeated champion. Eurozone crisis eliminates the chance of euro to become global currency in near future.

The strength of US Dollar

US Dollar

The strength of the US dollar is such that the seven countries have already adapted US dollar as their own currency. Rests of the 89 countries keep their currency in a tight range relative to the dollar. Almost 90% of the Forex trading is done through dollar. They use MT4 Indicators to know the precise market trends.

There are total 185 currencies in the world but none of them is as widely traded as the dollar. Now many of the Forex traders use MT4 Indicators to predict the future market trends of the dollar. Most of these currencies are just used inside their own countries. Any country acquires foreign currencies from their international transactions, from domestic businesses and from travelers who exchange their currency for local currencies.

The World’s Banks

Foreign banks need dollars in huge amount because around 40% of the world’s debt is issued in dollars. Non-American banks had 27 trillion dollars in international liabilities denominated in foreign currencies out of which 18 trillion dollars were in US dollars. Due to this US Federal had to increase its dollar swap line. A swap line is a term for temporary reciprocal currency arrangement between central banks. A bilateral swap line exists only between banks of two countries.

It was done so the world’s banks don’t run out of dollars. The wide usage of the dollar was increased even more during the financial crisis. The banks in Japan, Germany, France, and the UK have more dollar-denominated liabilities than in their own currencies. Regulations designed by banks to avoid the next financial crisis is making dollar scarce and hence making it even more powerful.

The Federal Reserve is increasing fed funds rate which will decrease money supply and makes the dollar even more expensive. The fed funds rate is basically the interest rate banks charge each other to lend Federal Reserve funds overnight. The Federal Reserve uses fed funds rate to control US economic growth.

1944 Bretton Woods agreement played the most important role in making dollar this powerful. Earlier all countries were following gold standards but in 1944, all the developed countries of the world decided to come up with a system to manage foreign exchange that would serve well for all the countries. So they decided to link all the currencies to the US dollar which was linked to gold. This agreement is known as Bretton Woods’s agreement. Due to this agreement, the dollar was eventually crowned as world’s reserve currency. Around 1970’s countries started converting their dollar reserve into gold. Due to this huge demand for Gold, President Nixon intervened and delinked Dollar from Gold. It created Stagflation which is a combination of inflation and stagnant growth. Throughout this period of Stagflation, US dollar remained official world reserve currency due to the strength of the US economy and dominance of the US financial markets.

The confidence world has in the United States for its ability to pay the debts is the reason that US dollar is still the undefeated champion and most redeemable currency for carrying out trading on a global level.

US Dollar to remain Strong for years to come

Over the years US government has built this perception that US currency is strongest on the global level. Because of this perception, almost 80% of the global trading takes place in US dollars. Exporters from all over the world trust only US dollar more than their own currency. Trading of the most important commodities in the world like gold, silver, oil etc. is done US$. Whenever the currency of some country crashes due to hyperinflation, they start doing all their trades in US dollars. This increases the demand and value of US dollars. The United States of America is considered as the strongest country on the planet in terms of their military force and power. World respect them for their taxation power, ability to finance debts, political sovereignty and their ability to honor the dollar bill itself. They have the power to interfere in the decisions of other countries in the world and take necessary actions without anyone’s permission when needed. This powerful image that the US has created also contributes to the strength of the US dollar.

The entire Chinese economy is based on the dollar. They use dollars as reserves at their central bank to create credit in the Chinese market. Not just China, but the entire global market operates through US dollars. Developing nations can borrow money only in dollars, not in their own currencies. Complete oil industry operates on the basis of the dollar. If US dollar collapses all other currencies will collapse too which is why it is in the interest of every country to support US dollar.

US dollar is “safe haven” currency for everyone in the world and considering current market scenario it will continue to be the strongest currency in the future too.

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