More than $1.8 trillion of U.S. currency is now in usage around the world, and it’s believed that two-thirds of $100 bills and nearly half of $50 bills are held outside the US. The U.S. dollar is the main factor of global currency, meaning it’s kept by many governments in a hold and most people and companies trust it for international trade. Even as the coronavirus pandemic destroyed global markets, wiping out trillions of dollars’ worth of assets, the U.S. dollar was untouched by the turbulence. At one point, it rose 4% against a load of major currencies, specifically the euro, pound, yen, Canadian dollar, Swiss franc, and Swedish krona.
In times of risk, investors retreat to what is known as safe havens, investments required to hold their value during market turbulence. U.S. currency is considered as a haven. It hails from the world’s biggest economy, the United States, which is generally politically and economically solid.
That demand for the dollar can create shortages during times of economic crisis, which only increases the larger problem. America’s central bank, the Federal Reserve, is accountable for issuing the currency and takes extra steps to prevent pressure when there’s a rush for the dollar. For example, during the economic and coronavirus crises, it set up several ‘swap lines’ with other main central banks, making sure there is sufficient money available for investment and spending. This helps maintain currency markets when the desire for the U.S. dollar rises.
For a long time, developed markets tied their currencies to gold. During the First World War, many of these countries dropped this gold standard and started paying their military expenses with paper money instead. Eventually, the U.S. dollar, which was still tied to gold, passed the British pound to become the world’s leading stock currency. During World War II, the United States traded weaponry and supplies to many of its allies and collected its payments in gold. By 1947, the U.S. had gained 70% of the world’s gold reserves, leaving other nations with a huge disadvantage. To try to control this and other financial matters, 44 Allied nations met in Bretton Woods, New Hampshire, in 1944. There, they decided that the world’s currencies would be undermined to the U.S. dollar. Which was in turn linked to gold.
In 1971, U.S. President Richard Nixon startled the world when he de-linked the dollar from gold. From there, free-floating exchange rates were produced, meaning exchange rates were no longer attached to gold and they were defined by market forces instead. Despite years of market volatility and the inflation that followed, the U.S. dollar has remained to be the world’s reserve currency.
For ages, there have been calls for an alternative reserve currency, ranging from countries like China and Russia to intergovernmental organizations like the United Nations. In modern years, some central banks have added the Chinese Yuan to their reserves. The cloud of U.S. sanctions has also inspired a desire for some countries to bypass dollar-denominated trading. And some are expecting the world’s future reserve currency won’t be tied to a national government at all. They see crypto currencies, such as bit coin, eventually overcoming the dollar.