When you are debating about the world’s best currency in 2021, you cannot leave the US Dollar out of the conversation. You can make the case for other currencies like the British Pound (GBP) and the Euro (EUR) as they are stronger and valued more than the US Dollar; or the Chinese Yuan (CNY), a currency rate in massive demand in 2021 due to China’s economic prowess; but the US Dollar is bound to be part of the conversation. In this article, we examine why is the US dollar the world’s best currency today in 2021?
In 2021, the US Dollar remains the strongest currency rate due to two major reasons:
- The US Dollar is the world’s major reserve currency:
A reserve currency is a currency of foreign exchange held by central banks in all countries and used for all international transactions. So let’s say if India wanted to trade 100 tonnes of rice with Maldives, they would not pay Maldives in Indian Rupees but rather use the reserve currency for the transaction. The Reserve Bank of India (India’s central bank) has an accumulated pool of US foreign exchange that it uses to pay for all international transactions.
The reserve currency is also used forinvestments and international debt obligations.
The US Dollar became the world’s reserve currency after the Bretton Woods agreement in 1944 at the end of WWII. Before WWII, the British Pound (GBP) used to be the major reserve currency but after the war ended, most European and Asian countries were completely shattered. The US economy had suffered from the war but not as seriously as other countries and was able to establish itself as the major reserve currency.
Today, the US dollar is the dominant reserve currency around the world and 88 percent of all international transactions were done with the US dollar in 2019. The US dollar also accounts for 61% of official foreign exchange reserves in central banks around the world.
The US Dollar is also widely used as a reserve currency today because of its stability and consistency as the Dollar’s currency rate has not experienced any significant fluctuations since WWII.
- The US Dollar is the currency of international funding and investment
The second reason for US Dollar dominance in 2021 is that it is commonly used as a currency for international debt and investments. In its paper, the Bank of International Settlements asserted that ‘around half of all cross-border bank loans and international debt securities are denominated in US dollars.”
This means that third world countries like Brazil and Yemen are completely dependent on the US Dollar for running their economies. Every time, Yemen takes a loan from IMF or the World Bank or any international financial institution to battle its domestic economic crisis, the loan is processed in US Dollars.
This overdependence of poorer and less-developed countries on the US Dollar for loans and investment purposes is another major reason for the dominance of the US Dollar.
Moreover, residents in third world countries have been converting their savings to US Dollars rather than saving in their local currency. They view the US Dollar as a completely safe instrument of saving due to the US Dollar currency rate today and are assured that their saving won’t lose value in the long run.
Future of the US Dollar:
Leading experts say it is unlikely that the US Dollar will be dethroned as the global reserve currency any time soon, despite the far reaching consequences of the coronavirus pandemic. Part of the reason for this is that most countries that use the US Dollar as their reserve currency have a huge reserve of US Dollars in their central banks.
In order to move away from the US dollar as your reserve currency, countries will need to find a way to exchange the millions and trillions of dollars they already have in their official reserves. This is also the reason that despite some inflation in USA under Biden in 2021, the world is still confidently continuing to use the US Dollar for foreign exchange.
It is true that there are currencies that are stronger than the US Dollar in terms of currency rate for example the Kuwaiti Dinar or the Swiss Franc, but the US Dollar still remains the best currency in 2021 due to world’s overdependence on it.
The only way that US dollar will be dethroned as the global reserve currency is when countries lose their confidence in the US Dollar and decide to stop using the US Dollar as their financial reserve currency and for international debt purposes.
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