Why is dollar considered the world currency?

When we look at global financial markets, there is always a currency that dominates the scene, that is what we call a world currency or reserve currency. The most popular world currencies today are the U.S. dollar, the yen, and the euro. However, among this three, the U.S. dollar still prevails. Why so?

The Rise of the U.S. Dollar


Long ago, all currencies were backed by gold reserves. After the World War II, United States has become the most powerful economy in the world. Since bank reserves did not have enough gold to sustain the growth of the currencies, economies started to abandon the gold standard and resorted to printed banknotes. By then, the U.S. began to produce more paper money to finance global economic growth; Thus, making the U.S. dollar the most powerful currency in circulation and sparking its rise as the world currency.

Although it does not hold an official status or is not titled as the official global currency, the U.S. dollar holds 64 percent of the known foreign exchange reserves of central banks, which makes it the world currency. The U.S. dollar held its position since it is used by more than 60% of all countries as their anchor currency.

The Dollarization


Dollarization is defined as the usage of dollar together with or as replacement of a country's domestic currency. Such event may happen even without a legal or formal approval from the U.S. government. Dollarization falls into three categories:

Official Dollarization - This happens when a country stops using their domestic currency and fully replaces it with the U.S. dollar. Some countries that exercise this are Ecuador, El Salvador and Zimbabwe.
Semi-Dollarization - This is where a country uses both the U.S Dollar and its domestic currency. Countries such as Cambodia and Lebanon are some examples.
Unofficial Dollarization - This is where the U.S. dollar is accepted in private transactions. However, they are not considered as officially legal. Most of developing countries around the world practice this.

The stability of the dollar as well as it being a world currency is the major factor why countries choose to use it as an official and unofficial currency. It also provides the country with a secure and stable economic environment.


Source link   Presented by GMOTrading

Related Columns

Equity Shares and their Shared Privileges

Equity share refers to the fraction of a company's assets which gives its shareholders a part of the entrepreneurial profits, risks and ownership rights of the...

Boosting Portfolios and Terminating Risks

In today's present world condition, we can confidently say to ourselves that we are living in times of uncertainties. In the world of financial market, uncertainties...

Investing with Safety in Mind

With low-risk investment options, you have to make a compromise. Investing in them will greatly minimize any financial risk but it will also lessen your rate of return. If you are retiring...

Euro vs. USD - Two giants in one Pair

Undeniably, Euro vs U.S. Dollar (USD) currency pair has the biggest name in the world foreign exchange enterprise. Why so? Euro and USD currencies circulate in countries included in the list of...


Taking Advantage on A Bearish Market

Shorting a stock has been popular and widely accepted investment strategy in past years. It had become increasingly globally known when Bill Ackman and...

A Tug of War of Pound vs Dollar

The pound vs dollar exchange rate has been on a consistent battle of push and pulls in the past two years. In mid-2016, the US dollar has enjoyed its glory days against the pound, when the British currency...

Pound Against Euro Pair Facts

One of the major currency pairs traded in the foreign exchange market today is the pound against euro This is because both currencies have seemingly low volatility and stability. In this article we will...

Futures Contracts And How They Work

Futures contracts are legal agreements between a buyer and a seller wherein they agree to buy or sell an asset at a predetermined price on a specific time in the future...


Futures Trading Strategies

Futures trading can be difficult if investment strategies are not defined and applied properly. Some point to the fact that futures market is also referred to as a zero sum game. This means for every profitable...