Why the dollar is important

dollars

Despite many calling for its demise the US dollar continues to be the most important currency in the world. This is not likely to change in the near future. Here we will examine why the US dollar will continue to maintain a dominant position, and we will also look at some threats to this position.

Most common partner

One of the biggest reasons that the US dollar is so important is because it is the most common currency among currency pairs. For example, you can trade Euros to USD or UDS to Japanese yen. Or you can exchange British pounds to USD. Either way the most common component among all the existing currency pairs is the dollar. This position keeps demand for dollars high because in many ways it is the “currency” of currency trading.

Large Reserves

For a long time the US dollar has been the primary reserve currency worldwide. More than 63% of the world’s currency reserves are in US dollars. This demonstrates the high level of confidence the central banks place in US currency.

#1 choice in commerce

The US dollar is the currency of choice in world commerce. There is a cost to convert money. If a country is looking to buy something they would rather buy with the currency they have on hand to avoid conversion costs. Given that the majority of the world currency is in dollars shows that most international business is done in dollars.

Value reference

Many countries hold large amounts of dollars in order to manage the value of their domestic currency. They might want to devalue their currency to stimulate exportation to the outside world making the countries goods relatively cheap. This monetary management is most often done in terms of the dollar and depends on large US dollar reserves.

Better than home currency

Many non-US countries and business do business both domestically and internationally in US dollars. This is because their home currency is unstable or holds little international value. Again, this stimulates the demand for dollars solely for the purpose of being able to do business. For example, in Argentina, home prices are listed in US dollars. Here a country is doing domestic business nearly exclusively in US currency.

Political and other intangible factors

Although the US dollar has seen a decline in its value compared to its heyday, US currency will be important for many years to come. One of the reasons is the political and military influence that the country holds. The position that the USA takes on the world stage is one of high interaction and intercession which generates confidence in the dollar.

Furthermore, the country is rich in natural resources making it relatively stable internally. Although there will be fluctuations the US dollar’s presence and influence is undeniable.

Future risk

Some feel that the recent economic crisis has revealed a serious underlying fiscal irresponsibility from the US treasury and government. Even if this is true, the world’s banks went along for the ride and are still left holding many dollars. In this case the imminent risk is China. As China grows and its currency increases in value and influence one could imagine a scenario where China begins to divest of its US dollar reserves. This could be disastrous for the dollar. This doomsday scenario would suggest a nearly all out economic war between the United States and China. However, this would not be in China’s best interests as the USA is by far its biggest customer.

By all measures, it looks like the US dollar is likely to be the number one currency for many years to come.

One Response to Why the dollar is important

  1. Mladen says:

    I think I heard that the average American faimly is in about $ 9,000 in credit card debt alone, this doesn’t include the car loan or the mortgage loan that people don’t really consider debt but living . Consumer credit card debt is close to triple what it was twenty years ago.

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