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7 Reasons Why Dollar is Global Currency

If you have been wondering why the United States dollar has remained a global currency, this post will give you every information on this, we will also tell you the role of the United States dollar in global economy.

Above all, we will provide answers to some questions that have been asked online regarding this topic.

Why dollar is the global currency?

What was the global currency before dollar?

What is a Global Currency?

A global currency could be defined as a currency that is generally accepted for international trade throughout all the countries in the world.

When a particular currency is used as a means of payment between nations across the world, such a currency is termed ‘global currency’.

A global currency can also be called ‘reserve currency’, among all the popular currencies in the world, the United States dollar stands out as the number one reserve currency.

Before going deep into the reasons why the United States dollar is global currency, let us briefly tell you about the role of the U.S. dollar in global economy.

The Role of the United States Dollar in Global Economy

There is no arguing the fact that the United States dollar is the most popular currency in the whole world.

It is the primary reserve currency for the world economy, it has remained as the global reserve currency ever since the World War II ended.

The United States dollar is the most widely used currency for trading between nations and other international financial transactions.

Several top commodities are valued in the United States dollar and this is why the demand for the USD has always been on the increase.

Despite not being the most valued currency in the world, the USD plays a pivotal role in international finance and trade.

International commodities like oil and gold are being valued and purchased with the United States dollar.

The dollar makes up a major part of the official foreign exchange reserves and bonds maintained by central banks.

The dollar holdings make up a huge share of the foreign currency deposits and bonds serviced and maintained by monetary authorities.

7 Reasons Why Dollar is Global Currency

1. Global Lending Policy

The global lending policy has continued to make the United States dollar to remain as the number one reserve currency in the world.

The World Bank and IMF have lend monies to several developing nations in U.S. dollars in line with the agreement at Bretton Woods.

What this means is that any attempt to service their debts or stabilize their country’s economy would mean that they will have to trade the U.S. dollars in open market.

2. Oil Is Priced In U.S. Dollars

You will agree that oil is one of the most sought-after commodity in the world today.

In many countries, example Nigeria where the aboki dollar to naira today is high, the United States dollar is the only denomination that is used in pricing oil, this is why the demand for the dollar has continued to expand.

Nations pay for oil with U.S. dollars, this means that the trading of dollars in the open market remains constant and may not likely drop as long as such commodities as oil are being paid for in dollars.

3. Strength and stability

The United States dollar has continued to remain as a reliable currency in the foreign exchange market, this is why several nations have trust in dollar-denominated transactions.

The stability of the United States dollar over the years and made it to be accepted worldwide.

It is the most powerful currency in the world and had about $1,671 billion in circulation as at 2018. The fact that its value rarely fluctuates makes it less risky for investors to buy dollar-denominated assets.

4. The robust United States economy

The United States economy remains as number one in the global ranking of countries with the strongest economy.

Economists believe that the United States will retain its position as the world’s strongest economy in years to come, they have forecasted a nominal GDP of $25.3 trilling in 2024.

The strength of the U.S. economy has been one of the major reasons why the U.S. dollar has continued to remain as the global currency.

5. The 2008 Financial Crisis

The United States dollar experienced more global usage during the 2008 financial crisis.

As a result of the crisis, non-American banks had more than $27 trillion international debts that were in foreign currencies, about $18 trillion of these debts were in U.S. dollars.

This made the U.S. Federal Reserve to increase its dollar swap line to ensure that the world’s banks do not run out of dollars.

As at 2018, banks in Great Britain, France, and Germany had more dollar-denominated liabilities than what they had in their own currencies.

6. The 1944 Bretton Woods Agreement

As we mentioned before, the 1994 Bretton Woods agreement was the structure that ensured the U.S. dollar became the global currency.

The meeting of world’s developed countries at Bretton Woods, New Hampshire, was to ensure that the exchange rates of all currencies are pegged to the United States dollar, this move increased the circulation of the dollar globally as countries were made to trade their gold for the U.S. dollars.

7. Trust and Confidence In United States debt repayment ability

The United States dollar has enjoyed its position as the global currency because of the trust and confidence that governments of countries all around the world have in the ability of the United States.

All the countries around the world have confidence in the capacity of the United States to pay off its debts, this has made the United States dollar to remain as the most redeemable currency in the world.

Why dollar is the global currency?

The dollar became a global currency immediately after the 1994 Bretton Woods Agreement, there are also other factors and events that have kept the United States dollar as the world’s reserve currency till date, such as, global lending policy, strength and stability of the dollars, the fact that oil is being priced in dollars, the robust economy of the United States, and the 2008 financial crisis.

What was the global currency before dollar?

The world reserve currency was the United Kingdom’s pound sterling.

This was changed after the 1944 Bretton Woods Agreement and the United States dollar become the global currency.