US dollar is one of the strongest currencies in the world now. It is the currency of the United States of America as well as many other countries around. Even though it has a big historical route in America, the dollar which we see now was first printed in 1914. The decades from there, it became the world’s leading reserve currency. Countries started pegging their currencies against the US dollar, especially after World War I. International Monetary Fund (IMF) also reported that about fifty-nine percent of all the foreign reserves of different banks across the globe are denominated in US dollars. Irrespective of the globally accepted position and value in international markets, the US dollar is still not the strongest currency in the world, but it is hanging around at 10th position on this list.
The gold standard of US dollars – Kavan Choksi
Federal Reserve Act 1913 made the Federal Reserve respond to the instability of its currency system, which was largely based on the banknotes previously. In the meantime, many of the developed countries used to peg their currencies on gold to stabilize the currency exchange rates. Kavan Choksi suggests that it was almost the same time that the economy of the United States became the largest in the world by surpassing the existing United Kingdom Pounds.
However, during World War I, which broke out in 1914, many countries started suspending the use of gold standards for paying their military expenses and replaced them with paper money. This caused a much bigger revaluation of different currencies. However, the UK held a gold standard to maintain its position as the leading currency in the world and borrowed money for the first time during the World War. Thus, the United States became a lender of choice for many countries where they wanted to buy dollar US bonds. By then, the dollar started replacing the pound as the major reserve currency of the world.
US dollar now
After World War I, as we discussed above, the dollar remained the world’s major reserve currency. Central Banks now hold fifty-nine percent of their reserves in US dollars as per International Monetary Fund. The dollar-denominated debts outside of the US also continue to grow, and it is about $12.6 trillion as per the 2020 stats. The position of the dollar in the global markets is being the 10th strongest, however, as per the CMC market report.
The dollar’s reserve status is largely based on the strength of the USA economy and the dominance of the financial markets in the US. Despite being the largest spending, there are trillions of dollars now in the US tertiary security, which remains one of the safest ways for money storage. Kavan Choksi says that this trust and confidence the world has in the US dollar to pay the debts also keeps the dollar the most redeemable currency. The credibility and value of the US dollar are also increasing day by day, and it is expected to keep the status the same in the long run.