The US dollar is the global reserve currency. This means that it is used to settle international transactions. In addition, the dollar is also used as a benchmark to set prices for commodities, as traders like Kavan Choksi UAE and others know.
The History of the US Dollar as a Global Reserve Currency
Gold and silver were the traditional currencies used for centuries. In 1944, global leaders at the Bretton Woods Conference agreed to establish a system based on fixed exchange rates of other key currencies pegged to the dollar. As a result, other countries would hold dollars as reserve currency instead of gold.
The dollar was convertible into gold at the rate of $35 per ounce during this time. A key reason for agreeing on so many levels to create a global reserve currency was that America’s economy and productive capacity had been unaffected by the devastation of World War II, unlike those of other major economies such as Germany and Japan.
The US held most of the world’s gold as it had secured much of its known gold supply. The US, in effect, was the center of the global economy and trade.
The Role of the US Dollar in the Global Economy
The US alone accounted for half of the entire free world’s economic output following World War II.
It was also during this time that the United States began its long-lived policy of interventionist foreign policy. These modernizing countries had fallen into chaos or were under communist control. The Marshall Plan, which sought to rebuild Europe, was one example.
The US did not want a third world war and maintained a strong military presence in Europe to deter the Soviet Union.
Dollar-denominated assets were safe during this period while the rest of the world crumbled under political uncertainty.
The Nature of Reserve Currencies
Reserve currencies are used for international trade and financial transactions, and all transactions are settled in the respective issuer’s currency.
For instance, if an Indian firm were to purchase oil from Kuwait, it would use the rupee because it is India’s reserve currency for settling a trade. On the other hand, if Kuwait was selling to China, its oil could be priced in renminbi (the Chinese yuan), which China uses to settle international transactions.
Oil, of course, is a highly sought-after commodity, and its price plays a big role in determining the value of currencies. Also important are industrial metals such as copper and aluminum used for making consumer goods. In short, these commodities have a close relationship with economic growth and inflationary trends worldwide.
Why the US Dollar is Headed Higher
The US dollar index is at multi-year highs.
There are many reasons for this, including the Federal Reserve’s tapering policy. This refers to reducing the flow of easy money into the market. The move began in 2013 when Ben Bernanke started talking about reducing asset purchases. Since he assumed office in 2006, the Fed bought $1.7 trillion of assets to fuel economic growth, manage low-interest rates, and increase liquidity in the market.
The US dollar is a strong currency and is likely to appreciate over the next few years. As a result, there are many ways to invest in the US dollar. For example, you can buy stocks, bonds, or ETFs denominated in US dollars.