The US Dollar is the most powerful currency in the world. It is used for transactions across the globe and is the benchmark for fixing the prices of goods internationally. Today, it is the reserve currency for the whole world.
Kavan Choksi – An insight into the history of the US Dollar
Kavan Choksi is an esteemed entrepreneur and business expert in the field of finance and investments. According to him, the US dollar had an interesting history before it evolved into the global currency for the whole world. In the past, transactions were conducted with gold and silver. With the Bretton Woods Conference, held in 1944, leaders across the globe decided to create a system where there would be a fixed exchange rate of major currencies against the dollar. This meant that instead of keeping gold as a reserve currency, these nations would retain dollars instead.
One of the prime reasons for the other countries to agree that the dollar would be a reserve currency for the world was because America’s economy remained unaffected after the Second World War, unlike its powerful economic peers like Japan and Germany. During that time, the dollar could be converted into gold at a rate of $35 for every ounce. Most of the gold in the world was owned by the USA. In fact, since it has a secure supply of gold, it became the main hub for trade and the global economy.
The function of the US Dollar in the world economy
Half of the globe’s economic output, in the war-free world, was owned by America after the Second World War. At this time, the USA started its age-old interventionist policy for foreign relations. Unfortunately, the countries that were considered modern at the time were the victims of chaos or were dominated by communists. The Marshall Plan, which had the object to re-build Europe, was an example of the above.
The USA never wanted a Third World War, and due to this, it maintained a potent military presence for deterring the Soviet Union in Europe. Assets that were denominated by the dollar were safe in this phase, while the other nations across the globe were crumbling under the pressures of political instability.
Salient traits of a reserve currency
A reserve currency is deployed for international financial and trade transactions. All these transactions are settled in the currency of the issuer. For instance, if any Indian company was to buy oil from Kuwait, the currency it would use is the rupee, as it is the reserve currency of India for trade settlement. Again, in case Kuwait sells this oil to China, its cost would be in renminbi (The Yuan of China) that the nation deploys for international trade settlements.
According to Kavan Choksi, oil is a popular commodity across the globe, so its price plays an influential role in determining currency value. Other important commodities that impact the value of currencies are aluminum and copper, as they are used for manufacturing consumer goods. In brief, these commodities retain a close bond with inflationary trends and the growth of the economy across the world.
