The American dollar can be called the most common currency in the world. Representing the national currency of the United States, it is at the same time a popular means of payment in other countries. Of course, domestic retail trade for dollars is prohibited in most states. But international contracts are often concluded precisely in this currency. And in some countries, the exchange rate of the national currency is wholly pegged to the dollar. This article will talk about how the American currency managed to gain such a position, and how the Trump administration can ensure it even more. But first, you need to understand the basic concepts.
The world currency status
The International Monetary Fund determines the status of the world reserve currency. It includes 188 countries that have the right to vote depending on the contributions paid. The United States has the highest number of votes. In certain situations, the IMF may issue loans to countries that need it. Some states do not cooperate with the IMF – for example, Cuba and the DPRK. In addition to the dollar, the world reserve currency also has the status of Japanese yen, Swiss franc, British pound, euro, and in 2016, the inclusion of the Chinese yuan. To obtain this status, some requirements must be met – the currency must be freely convertible, its rate must be relatively stable (sharp jumps and devaluations are not allowed).
The dollar is the most widespread among all reserve currencies. In international interbank settlements, its share is 42%.
It is also worth noting that the United States is the country with the largest economy and has the most developed financial market, the size of which exceeds the size of the financial markets of other countries. Naturally, on US financial sites, all commodities are traded in dollars.
In some countries, the exchange rate of their currency is tied to either the dollar or other reserve currencies to maintain financial stability.
It should be noted that even many unregulated FX brokers in the US encourage its clients to conduct trading in the USD because it is a dominant currency and is very stable across the world.
Thus, when they say that the dollar is the world currency, there are two circumstances in mind. First, the dollar has the status of a world reserve currency. Secondly, the dollar is the most widespread in the world, the largest share in international trade settlements, the highest authority, has a relatively stable exchange rate, and commodity prices on financial markets are quoted mainly in dollars. Many convenience contracts are also in dollars.
Trump and dollar
Trumps has noted several times about the fact, that strengthening dollar against other currencies was not desirable for the United States. But it goes without a question that dominance and adoption of dollar as a way of payment is useful for the country.
In the event of any political conflict, America has additional opportunities to put pressure on its competitors.
The crisis of 2008 showed that even in the largest economy, a situation might arise that threatens the entire financial system of the world. If this situation got out of hand, the consequences would be catastrophic. But even now, the crisis that began in the USA in 2008 is still not over. The solution to many problems is simply delayed in time.
This, of course, is possible. But for this, serious problems must arise in the US economy. The whole question is reliability and liquidity (enough money). With liquidity, it is now unlikely that serious difficulties can arise. But reliability can be called into question.
At the moment, there is no alternative to the dollar at all. No other currency has the same liquidity, does not have the same amount of money supply to cover trading in the world. Therefore, neither the yen, nor the pound, nor the Swiss franc can seriously compete with the dollar. If a country increases its currency, then its rate will plummet.
It is necessary either to provide the currency with something (with the same gold) or to expand its economy to the extent of at least equal to the American one. But this is not so simple. The United States still has the largest physical gold reserves. In terms of economy, China could compete. But China has a lot of problems. And there, the authorities do not have sufficient experience working with financial markets. The yuan is still not even freely convertible, and its share in international settlements is only 1.5%.
Theoretically, the dollar may fall due to problems in the US economy, and after a financial shake, states will continue to make settlements in national currency units. But it is important to understand that America, due to the position of its currency, has many levers to correct various imbalances and overcome the crisis.
And for the American currency to be squeezed by another national currency, perhaps, conditions must be created for this, similar to those created during the Second World War.
It is very difficult to give a forecast on how long the reign of the dollar will last. It was repeatedly predicted to die. But while it is more alive than all living things and the Trump administration will do everything to preserve its dominance.