Why U.S dollar is used as a common currency for trade?
The dollar is the most commonly held reserve and commonly used currency for international trade and other transactions around the world. Increasing demands of U.S dollars made U.S exports less competitive and resulted in lost jobs. On the other hand, This also benefits the United States where it made borrowing money abroad easily and help reach the U.S financial sanctions.
Despite the power that the dollar holds, it is Unlikely that the greenback will be replaced as the leading reserve currency anytime soon.
What are Reserved Currencies?
The reserve currency is a dollar which means Many countries cannot borrow money or pay foreign goods in their currencies since much of international trade is done in dollars. and its a must to hold reserve to ensure a steady supply of imports during a crisis and assure creditors the debt payments dominated in foreign currency.
Countries hold reserves for various reasons like economic shocks, paying for imports, Service debts and moderating the value of their currency. Sometimes the reserves can be used to help nations in crisis. For example, If the county continues to fall economically then the central bank of that country can step in and use the reserves to solve the problem. Central banks hold the reserves in the form of government bonds such as U.S treasuries. It is the easiest way of selling bonds out of the market.
According to the International Monetary fund(IMF) recognizes the U.S dollar is the commonly held reserve currency making up for 60% of global reserves.
How did the U.S dollar become the Currency of International trade?
After the Second World war, Bretton woods, a system was created wherein each country pegged the value of its currency to the gold at the rate of $35 per ounce. This came into action to prevent the “beggar thy neighbour”. By the 1960s the U.S didn’t have enough gold to convert the dollars in circulation and in August 1971, President Nixon suspended the Bretton woods system. After months later, Smithsonian Agreement was introduced to salvage the system by devaluing the dollar and allowing exchange rates to fluctuate more and it was short-lived.
Why did the U.S dollar dominate?
Factors that contribute to the U.S dollar domination is because of the stable value and the economic size of the U.S. In addition to this, no other country has a market for its debt akin to the United States which totals roughly 18 trillion. ” It’s more helpful to think of U.S treasuries as the World’s leading reserve asset,” says CFR’s Brad.W.Setster ” It’s hard to compete with the dollar if you don’t have a market analogous to the treasury market”
Still, the U.S dollar remains king because of the choice of preference status that U.S dollars hold for international trade. Major commodities like oil are sold only in dollars and still, countries like Saudi Arabia peg their currencies to dollars.
What’s in the future of dollars?
Experts believe that dollars will note overtaken as the world’s leading currency soon. It is likely for other countries to take the position. PIIES Bergsten says,” The United States should not only accept a more varied currency regime as inevitable reality but actively encourage such a development as part of its effort to recalibrate its international economic position”
Sester also supports a larger role for the euro and the shift that happens here is slow.
