The USD (United States Dollar) tops the list of most traded currencies. It is issued by the Federal Reserve (Fed). It is the official currency of the United States. It accounts for a daily average volume of US$2.9 trillion in Forex Trading.
What is the History behind the domination of USD?
Most developed countries in the earlier days pegged their currencies to gold to stabilize currency exchanges. But, things had taken a de route when World War I broke out. Many countries suspended their use of gold to pay their military expenses using paper money; this devalued their currencies.
Around this time, The United States became the lender for many countries that wanted to buy dollar-denominated U.S. bonds. It made the United States the World’s Biggest Economy and the USD the most traded currency in the world. The dollar replaced the pound as the leading international reserve currency and continues to rule the world.
What are the reasons behind the US Dollar becoming the most traded currency?
The USD is a widely accepted currency in the world. There are several reasons for the USD’s popularity.
● The United States is the world’s largest economy and a powerhouse in international trade.
● The US dollar is the world’s primary ‘reserve currency,’ held by central and commercial banks for international transactions and investment. It is estimated to make up nearly 63% of currency reserves by volume.
● Most reserves in the Central bank are in cash or US bonds such as US treasuries.
● Also, Dollar-denominated debt outside the United States continues to rise, which puts the USD on the top trading list. The estimated value of debt will be $13.4 trillion by this year.
● Most commodities’ prices are dictated in dollars, including gold, oil, and copper. These commodities are subject to the relative value of the U.S. dollar. Their prices are sensitive to inflation and U.S. interest rates, which can affect the dollar’s value.
● The USD has global acceptance in the most remote countries of the world. Most countries accept USD along with their official currency, which is known as dollarization.
● The USD acts as a benchmark for other countries that choose to fix or peg their currencies to the dollar’s value. For example, China had its currency, the yuan or renminbi, pegged to the dollar for a long time. Most countries usually peg their currencies to the U.S. dollar to stabilize their exchange rates rather than allowing the Forex markets to drive the currency’s relative value.
While the dollar’s value is significantly influenced by US economic performance and commodity demand, its value can also be affected by fluctuations in the financial performance of other countries that use it – either officially or as their de facto currency. These countries include Ecuador, Panama, and El Salvador, among others. Hence, fluctuations in the United States Economy can create significant financial volatility worldwide.