Why the dollar is the strongest currency in the world?

Why the dollar is the strongest currency in the world?

23 April 2018 06:10 PM

Why the dollar is the strongest currency in the worldFrom – Noha Al-Nahhas:

Mubasher: An action announced last week by Iran to replace the use of the US dollar by the government in its foreign transactions in the single European currency, raises the question “Is it possible to dispense with the green card in the global monetary system?”

For many years, the US dollar is the most powerful currency in the world, and the official in the central banks in their cash reserves, along with gold metal, which is finally in dollars.

The green card’s acquisition of that position for years without a real competitor made it difficult to have a strong alternative, even though the US dollar reserves fell to a four-year low in the fourth quarter of last year.

How has the dollar become the world’s first currency?

The dependence on the dollar as the main reserve currency in the world is not due to the position of the US economy in the global economy, because in this perspective the US currency will lose in competition.

The reason for this is that since the Second World War, the US share of global GDP has fallen from about 30% to 18%, surpassing China’s share by only 2%, and the share of emerging markets in global GDP increased from 40% to 60%.

Despite all that, the global financial policy has not changed in accordance with those developments and the dollar has maintained its status, and the password is “Bretton Woods”.

Bretton Woods is a historic agreement on cash exchange rate management, and the name of the agreement was attributed to the place where it was held in 1944, whereby the US dollar became the currency of the world’s cash reserve and linked to the price of gold metal.

Under the agreement, central banks will maintain fixed exchange rates between their currencies and the dollar. In return, the United States will replace the US dollar with gold on demand.

The system continued to function until August 15, 1971, when US President Richard Nixon declared a halt to the replacement of the dollar with gold, the most important element of the Bretton Woods system.

Then, in 1973, foreign governments allowed the currency to float, putting an end to the Bretton Woods system.

Until the 1970s, about two-thirds of the world’s GDP was based on the dollar, and the rest was largely divided between the British pound and the Soviet ruble.

Why the dollar is the strongest?

Many reasons have led the dollar to be on the list of the strongest currency at the level of the year, unlike the size and strength of the US economy.

Among these reasons is that more than a third of the world’s gross domestic product comes from countries that link their currencies to the green card, of which 7 are officially dollar-dependent.

Foreign exchange market .. More than 85% of that trade is based on the dollar, and 39% of the world’s debt is issued using the US currency.

Iqbal countries to retain the US currency in their reserves and acquisition of the first place in this regard, evidence of the strength of the US currency, as well as its use in international transactions.

Most of the global commodity contracts are denominated in US dollars, especially oil and gold, which are the world’s most important commodities, making the transactions of these commodities using green paper.

The US currency has always been able to overcome its pitfalls during the 1970s and 1980s, and from 1991 to 1993.

Although everyone was betting on the collapse of the dollar, and many governments thought to end the peg to the currency in the US, but it was stronger than the first.

Are there competitors?

In March 2009, China and Russia called for a new global currency that would become the currency of the world’s reserve currency, independent and non-volatile, as well as removing the shortcomings resulting from the use of national currencies linked to credit.

China has already called on the International Monetary Fund (IMF) to do so as a result of concerns that its trillions in US currency would become less valuable as a result of the US spending deficit and the issuance of US Treasury bonds to support debt.

Some countries have also tended to keep currencies other than the dollar in their cash reserves, with the yen holding in state reserves rising to the highest level since 2002 at 4.89% in the fourth quarter of last year.

The Chinese yuan also entered the reserve currency of the countries in the fourth quarter of 2016, and the total holdings of countries from the Chinese currency to 1.23% in the fourth quarter of 2017, compared to 1.12% in the previous quarter.

As the yuan entered the IMF’s Special Drawing Rights (SDR) currency, many considered it could replace the dollar as the world’s top currency, but the fact that it has been less frequent in trade and Chinese rules on exchange has played down that belief.

The Central Bank of China rules to set a reference rate for the yuan daily and only allows a margin of rise or fall of 2% of this level.