4 Strange Reasons Dollar is Powerful and Dominates International Trade
The US Dollar is the most powerful currency on earth, and its accounts for over 61% of international trade, it is the world reserve currency because of US Economic and Political stability. There are other strange reasons, the US Dollar is powerful and why it dominates International Trade
Myeduproject.com.ng carefully analyses 4 strange reasons, why the UD Dollar is the most Powerful among other currencies and why it dominates International Trade
Diplomatic influence and military force in the middle-East, Africa, and Europe to secure the dollar as the currency for oil trading is one of the primary reasons why the dollar has maintained dominance in a lot of international trading and hence become a reserved currency.
Many small economies don’t have the power to issue their currency based on government debt, instead, they peg their currency on the dollar, which requires them to hold the dollar in reserves.
The US has long used the dollar’s dominant position to its advantage. The first example, creating the international banking system known as SWIFT. Dollar money going internationally goes through SWIFT, of which the US, monitors all the transactions.
This is why if an entity in any nation tries to do business with a country that US sanctions, such as North Korea, Russia, Iran, etc, they can be caught by the US and sued.
Even though sanctioning the country is a political decision within the US, the international community has no bargaining power in that decision, there is no UN vote on that sanction decision. Internal US politics becomes international law.
The second example, the US government can continue to issue US debt without much worry because countries need to ensure the US dollar they are holding in their reserves continues to be stable.
This is why you see governments around the world continue to buy up US debt whenever the US has a financial/economic crisis, even though these crises have nothing to do with these governments. It’s basically foreign governments financially assisting the US’s internal issues.
For example, the financial crisis in 2008 was caused by a lack of government oversight of risky assets in the US. During the recovery, many countries around the world bought a ton of US debt to stabilize the US economy.
The federal reserve in the US can also do quantitative easing (QE) The fed buys US-based debt using money it has printed, this essentially creates m0. But this increase in m0 has no corresponding increase in GDP.
This has several effects:
1. Reduces the yield of US-based debt held by other nations.
2. Reduces the purchasing power of US reserves held by other nations
Dumping of Risky Assists
Raising the worth of the dollar during an economic crisis is because global investors dump riskier assets, such as those in developing economies, for comparatively safer assets in developed economies.
QE and low-interest rates might also increase the US dollars’ worth as money in saving accounts created during QE goes out into the stock and restate the market, driving up the desire to own dollars and invest in the US.
This capital flight from developing economies causes the price of their assets to fall and the value of their currency to fall. The first effect is that the citizens of the developing countries’ net worth are reduced as most of that is domestic currency denominated.
Lower Worth of Assets
The lower worth of assets in developing economies allows investors to use the dollar to re-purchase these assets at a lower price than when the capital is left at a later date.
As capital represents value and the movement of capital represents the movement of the value, this movement of capital represents a transfer of wealth from a developing economy to a developed economy.
We see this whenever there is a global crisis that spokes the markets. Just look at how the Indian rupee fell against the dollar during and after the 20008 financial crisis and 2020 financial crisis.