Why the US Dollar Is the Global Currency
Why the US Dollar Is the Global Currency
By Kimberly Amadeo Updated August 19, 2019
A global currency is one that is accepted for trade throughout the world. Some of the world's currencies are accepted for most international transactions. The most popular are the U.S. dollar, the euro, and the yen. Another name for a global currency is the reserve currency.
According to the International Monetary Fund, the U.S. dollar is the most popular. As of the first quarter of 2019, it makes up 61% of all known central bank foreign exchange reserves. That makes it the de facto global currency, even though it doesn't hold an official title.
The next closest reserve currency is the euro. It makes up 20% of known central bank foreign currency reserves. The chance of the euro becoming a world currency was damaged by the eurozone crisis. It revealed the difficulties of a monetary union that's guided by separate political entities.
The U.S. Dollar Is the Strongest World Currency
The relative strength of the U.S. economy supports the value the dollar. It's the reason the dollar is the most powerful currency. Around $580 billion in U.S. bills are used outside the country. That's 65% of all dollars.
That includes 75% of $100 bills, 55% of $50 bills, and 60%of $20 bills. Most of these bills are in the former Soviet Union countries and in Latin America. They are often used as hard currency in day-to-day transactions.
Cash is just one indication of the role of the dollar as a world currency. More than one-third of the world's gross domestic product comes from countries that peg their currencies to the dollar.
That includes seven countries that have adopted the U.S. dollar as their own. Another 89 countries keep their currency in a tight trading range relative to the dollar.
In the foreign exchange market, the dollar rules. Around 90% of forex trading involves the U.S. dollar. The dollar is just one of the world's 185 currencies according to the International Standards Organization List, but most of these currencies are only used inside their own countries.
Theoretically, any one of them could replace the dollar as the world's currency, but they won't because they aren't as widely traded. The chart below shows a breakdown of the 10 most traded currencies in 2018.
Almost 40% of the world's debt is issued in dollars. As a result, foreign banks need a lot of dollars to conduct business. This became evident during the 2008 financial crisis. Non-American banks had $27 trillion in international liabilities denominated in foreign currencies.
Of that, $18 trillion was in U.S. dollars. As a result, the U.S. Federal Reserve had to increase its dollar swap line. That was the only way to keep the world's banks from running out of dollars.
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