Introduction

The currency which is acceptable all over the world for trading is called global currency. Few currencies of the world are acceptable as the most international transactions. The most popular of the few is the US dollar, Euro and yen stands next in the queue.

As per the International Monetary Fund, the U.S. dollar is the most popular. As per the 2020 records, It makes up over 59% of all known central bank foreign exchange reserves. This makes it a global currency. The next closest currency is the euro which makes 20% of known central bank foreign currency reserves.

 The chance of the euro becoming a world currency was damaged by the eurozone crisis. It revealed the difficulties of a monetary union that’s guided by separate political entities.

The U.S. Dollar Is the Strongest World Currency

The dollar is the hero in the foreign exchange market. 90% of forex trading involves the U.S. dollar. According to the International Standards Organization List, the dollar is just one of the world’s 185 currencies however; most of these currencies are only used inside their own countries.

Around 40% of the world’s debt is issued in dollars. Thus, foreign banks need a lot of dollars to conduct business. This was proved in the 2008 financial crisis. The Non-American banks had $27 trillion in international liabilities denominated in foreign currencies. From that, around $18 trillion was in U.S. dollars. Thus, the U.S. Federal Reserve had to increase its dollar swap line. That was the only way to keep the world’s banks from running out of dollars.

The financial crisis made the dollar even wider in use. In the year 2018, the banks of Germany, France, and Great Britain held more liabilities denominated in dollars than in their own currencies.

Moreover, the bank regulations which were enacted to prevent another crisis have made dollars scarce, and made the Federal Reserve to increase the fed funds rate. This in turn decreased the money supply which made the dollars more expensive to borrow.

The main reason for the government to hold the dollar in their foreign exchange reserves is the dollar’s strength. Governments acquire currencies from their international transactions. They also receive them from domestic businesses and travelers who redeem them for local currencies.

U.S. dollar become the world’s leading reserve currency?

As per the Bretton woods, a system of exchange rates were created wherein each country pegged the value of its currency to the dollar, which itself was convertible to gold at the rate of $35 per ounce. This was designed with a view to provide stability, and prevent the beggar-thy-neighbor currency wars of the 1930s—a response to the Great Depression—by which countries abandoned the gold standard and devalued their currencies to try to gain a competitive advantage.

By the year 1960s, the United States did not have enough gold to cover the dollars in circulation outside the United States which lead to fears of a run that could wipe out U.S. gold reserves. After the efforts that failed to save the system, President Richard Nixon suspended the dollar’s convertibility to gold in August 1971 which marked the beginning of the end of the Bretton Woods exchange rate system.

The Smithsonian Agreement which was struck a few months later by ten leading developed countries, attempted to salvage the system by devaluing the dollar and allowing exchange rates to fluctuate more, but it was short-lived.

By 1973, the current system of mostly floating exchange rates came in place. Many countries still manage their exchange rates either by allowing them to fluctuate only within a certain range or by pegging the value of their currency to another, such as the dollar.

The U.S. dollar still remains king. Along with accounting for the bulk of global reserves, the dollar is the currency of choice for international trade. Major commodities such as oil are primarily bought and sold using U.S. dollars. Some countries, including Saudi Arabia, still peg their currencies to the dollar.

Factors that contribute to the dollar’s dominance also include its stable value, the size of the U.S. economy, and the United States’ geopolitical heft. In addition, 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. Setser. “It’s hard to compete with the dollar if you don’t have a market analogous to the Treasury market.”

Which Country’s Currency Could Be the Next World Reserve Currency?

China’s renminbi could surpass the dollar, a goal that the country’s leaders are keen on realizing. Global reserves account for about 2% and the use of the renminbi around the world is rising.

The U.S. Dollar Today

Most people would believe that this makes the dollar the strongest currency in the world. Despite its position in the global markets and how dependent they are on it, the dollar ranked as the 10th strongest currency, according to CMC Markets. The site ranked the Kuwaiti dinar as the strongest currency while the British pound and the euro earned the fifth and eighth spots respectively.

Final words

Even though trillions of dollars is in foreign debt and continuous large deficit spending, the United States stands first in holding global trust and confidence in its ability to pay its obligations. Hence, the U.S. dollar remains the strongest world currency. It may continue to be the top global currency in the upcoming years also.