Today the US dollar is the world’s reserve, and it is used to settle global transactions. Besides the above, it is used as a benchmark for setting the prices of commodities across the world.
Kavan Choksi – The history of the dollar in the USA and the developments that followed
Kavan Choksi is a business expert in finance and investment. Across the world, silver and gold are the conventional currencies that have been used for centuries. In the year 1944, leaders across the world met at the Bretton Woods Conference, and they agreed to create a system that was based on the fixed rates of the other key currencies that had been pegged to the US dollar. This resulted in other nations that would hold the dollars as the reserve currency in place of gold.
The dollar later became converted into gold and was fixed at the rate of $35 per ounce at that time. The USA mostly held the world’s gold, and this made it the center of the trade and economy of the globe. A key reason for agreeing on several levels for creating a global reserve currency is that after World War II, the economy of the USA and its productive capacity were unaffected by its devastation, unlike the other major economies of the globe like Germany and Japan.
The US dollar and its role in the global economy
The USA alone had accounted for 50% of the whole world’s output after World War II. This was the same time that the USA started the Interventionist foreign policy where the modernizing nations had gone into chaos or were under the control of the communist parties. One example was The Marshall Plan, which was created with a mission to rebuild Europe.
Reserve currencies and their nature in the world
Reserve currencies are deployed for global trade and global financial transactions, and all of them are settled in the currency of the issuer. For example, if an Indian firm was to buy oil from Kuwait, it would make the payment in rupees for the settlement of the trade. Again, if Kuwait sold China, its oil could be placed in renminbi or the Yuan that China deploys for the settlement of global transactions.
Oil is a popular commodity, and its cost plays a huge role in the determination of the value of the other currencies. Industrial metals like aluminum and copper are used for manufacturing consumer goods. In brief, these commodities have a relationship that is close to economic growth and inflationary trends across the globe.
According to Kavan Choksi, the dollar of the USA is currently at a multi-year high. There are several reasons for this, and one of them is the tapering policy of the Federal Reserve. This means that the circulation of easy money in the market will be reduced. This step started in 2013 when talks about decreasing asset purchases started. Over time, the US currency has grown in power and is one of the strongest currencies in the world.