Why Dollars Are Used As International Currency?

Every country in the world today must have some of its reserves in USD to ease its transactions in conducting global trade. In fact, most of the commodities that exist will be traded according to their value in USD. Meaning to say that every country in the world that wishes to buy or sell something will need to use the USD.

Why does all this happen and why not use the local currencies instead?

ADVERT

It all started in 1944 when the developed countries agreed to establish the International Monetary Fund and World Bank. It was also during that time that the exchange rate system has been introduced where all countries can peg their money towards USD.

The USD currency can also be exchanged for gold at the rate of $35 for 1 ounce. This was done to avoid other countries from drastically reducing their own currency to gain the benefit from export.

But unfortunately in 1960, the power of the USD as the world's powerhouse currency was at threat when the gold reserves of the United States of America were at a low. This means that the USD currency being traded internationally was of no value.

Ultimately, many countries took the initiative to exchange their USD reserves for a more stable currency. The increase in inflation following the involvement of the US in the Vietnam War has made things worst as huge spending was needed to fund the war.

It was certain that America's wish to become the world's police almost destroyed its own economy.

The problem was solved when the US requested help from Saudi Arabia to run their oil business by using USD currency. In return, the US will send military aid to Saudi Arabia when needed.

Ever since then, many oil transactions in the world will use USD as their main currency. So whether we like it or not, countries across the globe will need to have USD reserves to purchase oil from Saudi Arabia.

Aside from that, USD happens to be the strongest currency in the world with the US itself becoming its main contributor. With the size of the country, the number of populations, and the strength of its economy, it is to no surprise that the USD is the most stable currency in the world as of now.

Not just that but we rarely hear about any chaos happening in the US despite the country practicing freedom of speech on a hardcore level. Even if there were any, it seems that the US can easily overcome it. This stability is what gives the confidence to other countries to believe in the currency and that the USD will not weaken.

On top of that, as much as $2.04 billion have been used in transactions across the world. More than half of that was used outside of the US meaning that other countries are comfortable with using the currency for their international trades.

ADVERT

If that is not enough, the global financial crisis has also made it a must to use USD for global trade. How does it happen one might say? When a financial crisis occurs, several banks around the world will increase their USD reserves to avoid losses when their local currency declines.

Are there any currencies out there that can affect the global status of the USD?

The answer to that will be EURO and Yuan. As of today, EURO holds around 20% of the world's reserve. The European Union(EU) which comprises several European countries that have their own economic power can compete with the US.

The use of one particular currency the EURO in the EU has made it even stronger and more stable. Unfortunately, its own strength has also become its weakness as the EU failed to make the countries use EURO as their own reserve.

Yuan on the other hand is seen to gain in popularity on the global stage as China starts to rise in power as an economic powerhouse that can overthrow the US for being the world's strongest economy.

But as of today, China through the Yuan only holds 2% of the world's reserve. In addition to that, China seems to be struggling with its own problems of debts and COVID-19 that never seem to end.

Source: