The US Dollar as a Global Currency

When we say, “global currency,” we’re talking about a currency most of the world’s countries use. You can use this currency as money for international transactions. And with that, the first currency that comes into mind is the US dollar.

The Greenback

You can call the buck or the greenback. Whichever moniker you prefer, there’s no denying the people perceive the US dollar as the world’s de-facto global currency.

Although the euro and the yen are also frontrunners, the King Dollar is simply what many choose to use.

The US dollar is the reserve currency of the world and it holds influence and power over the current financial system that the world uses.

The Strongest Global Currency

The US economy is the world’s top economy. This makes it unsurprising that the US dollar gets its primary strength from Uncle Sam’s economic strength.

More than $580 billion are outside the US, or 65% of all of the dollars in the world. Where are these dollars, you ask? Countries use them in day-to-day international transactions.

In the Forex Markets

The buck also dominates the forex markets. Any currency pair that has the US dollar in it plus another major currency makes up a major currency pair.

In figures, that means more than 90% of all trading transactions go with the US dollar. That’s even more mindboggling if you realize that the dollar is just of the 185 currencies in the world.

In theory, any of those currencies can try and dethrone the dollar as the top global currency of the world.

However, that’s not happening anytime soon because they’re not as widely traded as the dollar, or as widely used.

A Bit of History

But how exactly did the dollar become the world’s reserve currency? It all started with the Bretton Woods agreement of 1944, which allowed countries to peg their exchange rate to the US dollar.

Around these times, the world was following the “gold standard,” wherein countries could redeem their currencies for their value in gold terms.

Since the US held the largest gold reserves at that time, countries decided to back their currencies using the dollar instead of gold.

In the early years of the 1970s, countries wanted to get gold for the dollars they were holding. They also needed to fight inflation, which is the rise in price of goods and services.

Instead of letting the gold reserves run dry, then-President Richard Nixon cut the ties of the US dollar and gold. During that time, the dollar already has massive influence. It was already world’s most dominant reserve currency.

This effectively got rid of the gold standard. And the dollar has since become the world leading global currency.

Will the Dollar Stay as the World’s Global Currency?

Only time will tell. However, right now, it certainly appears that the dollar isn’t going anywhere anytime soon. Although China and Russia have called for a “one world currency,” the current dependence of the world to the US dollar and the currency’s strength will probably ensure that the dollar will stay as the one and only King Currency in the forex world.