The US Dollar As The Leading International Reserve Currency
Monday, September 22nd, 2008
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The US dollar has always been the most imperative reserve currency in the world, to date at least. So significant is the US dollar bill in its trade that it is said that up to 70 percent of international currency reserves today is made out of the US dollar. This is probably the reason why the United States can afford to run higher global trade deficits and get away with it, its because of the much delayed impact this has on its economy. This “float” illusion also ultimately gives the US dollar bill enough time to recuperate, and in doing so helps to absorb some of the brunt of a financial crisis.
The reason the US dollar gained such an acclaimed reputation is due to it consistency in strength, making it a favorite amongst international traders. It was so commonly used in international trade that nations began stockpiling US currency as a indefinite form of bailout. The stash also directly helps strengthen export competitiveness within these countries, although this would also directly result in the weakening of their own respective currencies. Another advantage to stockpiling the US dollar is the fast and great inflows of capital it creates, which ultimately helps its intention in buffering against any impending financial predicaments.
This wasn’t always the case though, the US dollar did not have as much international presence as it does today early in the century, and this is why many experts say the US economy crashed back in 1929, during the great depression, because the world wasn’t as dependant on it as it is today.
Even essential commodities like gold and oil are priced in US dollar to create a more common global denominator, eliminating unhealthy trade competition, and many countries retain the currency as a means to ease trade.
The US dollar was initially established as a reserve currency principally because the US flooded the world with economical but quality manufactured goods, forcing international markets to have US dollar ready-at-hand. This is no longer the case these days, US made goods are now expensive and countries like Japan produce higher quality goods for fraction of the price.
Today, the US dollar is slowly loosing its appeal as the preferred reserve currency globally, thanks to the introduction of the Euro, arguably a much more stable currency, although continuous debates follows those who may think otherwise. Whatever it may be, I think the US dollar will preserve its status as the number one reserve currency for a long long time to come.
