Why Dollar is Global Currency | Why US Dollar is an International Currency?

Why Dollar is Global Currency | Why US Dollar is an International Currency?
The Dollar: The World’s Currency
The dollar’s role as the primary reserve currency for the global economy allows the United States to borrow money more easily and impose painful financial sanctions. But some experts say the costs to areas such as the Rust Belt are too high to bear.
Introduction
Since the end of World War II, the dollar has been the world’s most important currency. It is the most commonly held reserve currency and the most widely used currency for international trade and other transactions around the world. The centrality of the dollar to the global economy confers some benefits to the United States, including borrowing money abroad more easily and extending the reach of U.S. financial sanctions.
But some experts argue that dollar supremacy comes at a cost. Increased foreign demand for U.S. bonds bids up the dollar and makes U.S. exports less competitive, resulting in trade deficits and lost jobs. And the dollar’s role in many global transactions puts pressure on the U.S. Federal Reserve to act as the world’s lender of last resort during economic crises, such as the one triggered by the coronavirus pandemic. Despite the concerns about the dollar’s power, many experts say it is unlikely that the greenback will be replaced as the leading reserve currency any time soon.
What is a reserve currency?
A reserve currency is a foreign currency that a central bank or treasury holds as part of its country’s formal foreign exchange reserves. Countries hold reserves for a number of reasons, including to weather economic shocks, pay for imports, service debts, and moderate the value of its own currency. Many countries cannot borrow money or pay for foreign goods in their own currencies-since much of international trade is done in dollars-and therefore need to hold reserves to ensure a steady supply of imports during a crisis and assure creditors that debt payments denominated in foreign currency can be made.
By buying and selling currencies on the open market, a central bank can influence the value of its country’s currency, which can provide stability and maintain investor confidence. For instance, if the value of the Brazilian real starts to fall during an economic downturn, the Central Bank of Brazil can step in and use its foreign reserves to bid up its value. Conversely, countries can intervene to stop their currencies from appreciating and make their exports cheaper.
Most countries want to hold their reserves in a currency with large and open financial markets, since they want to be sure that they can access their reserves in a moment of need. Central banks often hold currency in the form of government bonds, such as U.S. Treasuries. The U.S. Treasury market remains by far the world’s largest and most liquid-the easiest to buy into and sell out of-bond market.
How did the U.S. dollar become the world’s leading reserve currency?
The dollar’s status as the global reserve currency was cemented in the aftermath of World War II by the 1944 Bretton Woods Conference, in which forty-four countries agreed to the creation of the IMF and the World Bank. (Some economists have argued that the dollar had overtaken the British pound as the leading reserve currency as early as the mid-1920s.) At Bretton Woods, a system of exchange rates was 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 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 1960s, however, the United States did not have enough gold to cover the dollars in circulation outside the United States, leading to fears of a run that could wipe out U.S. gold reserves. Following failed efforts to save the system, President Richard Nixon suspended the dollar’s convertibility to gold in August 1971, marking the beginning of the end of the Bretton Woods exchange rate system. The Smithsonian Agreement, 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 was 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.
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