US Dollar: Why It Became a Global Currency
A global currency means it is accepted for trade all over the world. The most popular currencies are the U.S. dollar, the euro, and the yen. These currencies are also used for many international transactions. A global currency is usually called the reserve currency.
The U.S. dollar is the most popular currency in the world, according to the International Monetary Fund. It made up over 60% of all known central bank foreign exchange reserves in 2019. The U.S. dollar is the official currency of the United States as well as several other countries. Here is why it became a global currency.
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History of the U.S. Dollar
The U.S. dollar has a deep history in the United States; it was first printed in 1914. It was the year after the establishment of the Federal Reserve as the nation’s central bank with the passing of the Federal Reserve Act.
The dollar became the world’s reserve currency three decades later. At the same time, the first documented usage of paper currency in the U.S. dates back to 1690. It was the time when colonial notes were issued by the Massachusetts Bay Colony. Military operations were funded with the help of these notes.
The first $2 bill was introduced in 1776 which happened to be nine days before independence. The dollar sign was adopted later in 1785. The Office of the Comptroller of Currency (OCC) and the National Currency Bureau were established by the government in 1863. At first, private companies printed money but in 1869 the Bureau of Engraving and Printing started centralized printing.
Is the Dominance of the U.S. Dollar Being Eroded?
Russian president Vladimir Putin announced at the 14th BRICS summit in June that the association aims to develop a new international reserve currency. This move was obviously intended to target the US dollar’s status as the global currency.
Russian leaders suspected that the dollar’s days of being the reserve currency are numbered. To understand how real it is, we should look at the way reserve currencies function and why the U.S. dollar is so popular.
The USA can meet its international obligations by printing money, unlike other countries, mention various experts. It means the country has no budget constraints in making loans, expenses, and grants abroad. When consumers have temporary financial issues, they are also offered a wide choice of lending options and credit cards with $10,000 limit guaranteed approval to suit their needs.
Dollar dominance allowed our country to unleash an economic weapon against Russia in retaliation for its invasion of Ukraine in February 2022. The USA and its allies froze the Central Bank of Russia’s reserves which removed the country’s means of stabilizing its currency by purchasing rubles with dollars on foreign exchange markets. On the other hand, this act might have a negative effect on dollar hegemony moving forward.
The establishment of the euro was used to protect the EU economy from foreign exchange shocks and limit its dependence on foreign currencies. Besides, the Eurasian Economic Union reached an agreement to develop a new international currency.
“The aim of these countries is to become free from the usage of the dollar as they face restrictions on its usage for foreign payments”, said Luca Fantacci, an economic historian at the University of Milan.
Why the U.S. Dollar is the Global Currency
The current dollar position was kickstarted by the Bretton Woods agreement in 1944. The majority of countries were on the gold standard before them. This agreement was conducted at Bretton Woods, New Hampshire. It was done due to the fact that the USA held the biggest gold reserves at that time.
Why was this agreement important? It allowed other countries around the world to back their currencies with dollars instead of gold. Hence, they began to require gold for the dollars they had by the 1970s as they wanted to combat inflation. Later, the dollar was separated from gold by President Nixon.
The U.S. Dollar Global Roles
Will developments in geopolitics, technology, and the financial market lower the dollar’s important role in the global economy? Some experts suggested that the sanctions on Russia and the pandemic may change the role of the dollar. According to the Federal Reserve Bank of New York, despite the mentioned facts, the international role of the dollar remains quite strong for investment and trade.
The usage of economic sanctions has caused a few countries to think twice about their reliance on the U.S. dollar. Certain official indicators point to certain erosion in foreign currency reserve holding. Foreign investors could be concerned about the inflation rates and rising U.S. public debt levels. Yet, American assets are considered to be liquid and safe and they have withstood the influence of global shocks.
The U.S. Dollar Today
What about today? The U.S. dollar is still the reserve currency in the world. Nowadays, central banks hold about 60% of their reserves in U.S. dollars, mentions the International Monetary Fund. The majority of these reserves are in U.S. bonds or cash. The outside debt of the USA keeps on increasing, reaching $13.4 trillion in 2022.
Many consumers suggest that this is why the dollar is considered to be the strongest currency in the world. The U.S. dollar ranked as the 10th strongest currency in spite of how dependent the global markets are on it and its position in them. CMC Markets ranked the euro the eighth strongest currency.
The Bottom Line
The U.S. dollar became the official reserve currency in 1944. A delegation from 44 Allied counties called the Bretton Woods Agreement made this decision. Currently, the U.S. dollar is the global currency or the reserve currency. Its status is based on the strength and size of the American economy. U.S. Treasury securities stay safe for storing funds in spite of trillions of dollars in debt and deficit spending.
What makes this currency so important? The ability of the USA to repay its debts keeps the confidence and trust in U.S. Treasury. It keeps the dollar as the most trusted and redeemable global currency.
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