US currency breaking all it’s previous records by reaching above RS 198 in the interbank market. As per the report of Forex Association of Pakistan, dollar increase rate is the highest of all time that will going to impact the economy of Pakistan.
The Dollar: The World’s Currency
Every other person wants to know the conversion of dollar to Pakistani rupees. But the question is why it’s so important for the whole world to know that and why the US dollar worth the most.
The dollar becomes the world’s most important currency after the end of World War II. It is the most commonly used reserve currency and the most widely circulating currency for transactions and international trade. The dollar’s centrality to the global economy confers some benefits to the United States, including borrowing money abroad more efficiently and extending the reach of U.S. financial sanctions.
A global currency is the primary trading currency throughout the world. Some other currencies are also used for most international transactions, just like the euro and the yen. Reserve currency is another name for a global currency.
IMF(International Monetary Fund) declared that, the U.S. dollar is the majorly used currency in most of the countries. According to the quarterly statistics of 2019, 60% of all major foreign exchange reserve were in US dollar, that declares it a Global Currency without holding any official title.
History of the U.S. Dollar
The U.S. dollar became the world’s reserve currency officially and was backed by the world’s largest gold reserves after the Bretton Woods Agreement. Instead of gold reserves, other countries reserve U.S. dollars. Governments needed to store their dollars; they began to buy U.S. Treasury securities, which they considered a safe money store.
The gold and currency were interlinked, but then-President Richard Nixon was forced to de-link the dollar from gold, leading to the floating exchange rates as of today. Although there have been different times of stagflation, which is known as high inflation and high unemployment rate, the U.S. dollar has remained the world’s reserve currency.
The power of the U.S. economy supports the value of the dollar and makes it Strongest World Currency. As of 2020, the U.S. had $2.04 trillion in circulation.
The dollar ruling around 90% of forex trading involves the U.S. dollar according to the foreign exchange market. According to the ISO [International Standards Organization] List, the dollar is just one of the world’s 185 currencies. Still, the truth is that most of these currencies are just used inside their own countries and not the world widely.
Theoretically, any nation’s currency could have replaced the dollar as the world’s currency, but it won’t be possible because they aren’t as widely traded as the U.S. dollar.
Almost 40% of the world’s debt is taken in dollars. As a result, foreign banks need many dollars to conduct their businesses. This became the biggest evident during the 2008 financial crisis around the world. Non-American banks had international liabilities denominated in foreign currencies, which was $27 trillion, and $18 trillion of that was in U.S. dollars. As a result, U.S. Federal Reserve updates the policy to increase its dollar swap line to not face this situation in the future. That was the only way to decide to save the world’s banks from lacking out of dollars at any time.
The financial crisis in the whole world made the dollar essential and made it the most widely used currency. In 2018, the inter banks of major countries like Germany, France, and Great Britain held more liabilities in dollars than in their own currencies. That can happen when the Federal Reserve maximizes the fed funds rate. That decreases the chances of the money supply by making dollars much more expensive to borrow.
Everyone wants to know why is the us dollar so strong Because that is the reason why significant governments are keen to hold the dollar currencies in their exchange reserves.
Many governments preferred to invest their reserves in foreign currencies. The United States is also the largest export partner to both China and Japan, and they gradually buy the cash of their main export partners. They try to keep their currencies cheaper than U.S. currency, so their exports are competitively priced.
The U.S. Dollar Current Situation:
The dollar remains the highest world reserve currency today, making it significant for ages. Central banks held 59% of their total reserves in U.S. dollars during the evaluation of the fourth quarter of the 2020 survey, as per the International Monetary Fund (IMF). Many accounts are in cash or U.S. bonds, like U.S. Treasuries. Dollar-denominated debt outside the US Dollar coins and Rupees continues to rise and empower, reaching $12.6 trillion as of mid-2020, which is enormous.
Most people would also believe that this makes the dollar the strongest currency globally. According to CMC Markets, despite its position in the global markets and how dependent they are on it, the dollar ranked as the 10th strongest currency. The site ranked the Kuwaiti dinar as the strongest currency, while the British pound and euro earned the fifth and eighth spots.