Why the value of Dollar is so high

 You know this as the U.S. dollar. It’s the official currency of the United Statesand its territories, but, also, some other countries use itas their official currency too. In fact, the U.S. dollar is known as the world’sreserve currency. So how exactly did this become so powerful? More than $1.8 trillion of U.S. currency isnow in circulation around the world, and it’s believed that two-thirds of $100 bills andnearly half of $50 bills are held outside the US. In fact, the U.S. dollar is the de facto global currency,meaning it’s kept by many governments in reserves and that most people and companiestrust it for international trade. Even as the coronavirus pandemic wreaked havocacross global markets, wiping out trillions of dollars' worth of assets,the U.S. dollar was unaffected by the turmoil. At one point, it soared 4% against a basketof major currencies, namely the euro, pound, yen, Canadian dollar, Swiss franc and Swedishkrona. So why did we see this spike in the valueof the U.S. dollar? The dollar is strong because of the U.S. economyand because people want to hold dollars and the safety of the U.S. dollar. In times of uncertainty, investors flee towhat’s known as safe havens, investments expected to hold their valueduring market turbulence. And you guessed it, the U.S. currency is seenas such. Why? Well it hails from the world’s largest economy,the United States, which is generally politically and economically stable. And while you can be pretty sure that theU.S. dollar’s value will fluctuate, it probably won’t plunge the way the Turkish Lira orArgentinian Peso have. All of that demand for the dollar can causeshortages during times of economic crisis, which only exacerbates the larger problem. America’s central bank, the Federal Reserve,is responsible for issuing the currency, and takes extra measures to prevent a squeezewhen there’s a rush for the greenback. For example, during the financial and coronaviruscrises, it set up a number of ‘swap lines’ with other major central banks, making sure there isenough money available for investment and spending. This helps stabilize currency markets whenthe desire for the U.S. dollar surges. So how exactly did the U.S. dollar becomethe major reserve currency of the world? Well, for a long time, developed economiestied their currencies to gold. However, during the first World War, manyof these countries abandoned this gold standard and started paying their military expenseswith paper money instead. Eventually the U.S. dollar, which was stilltied to gold, overtook the British pound to become the world’s leading reserve currency. During World War II, the United States soldweapons and supplies to many of its allies and collected its payments in gold. By 1947, the U.S. had accumulated 70% of theworld’s gold reserves, leaving other nations with a huge disadvantage. To try to remedy this and other financialmatters, 44 Allied countries met in Bretton Woods, New Hampshire, in 1944. There, they decided that the world’s currencieswould be pegged to the U.S. dollar, which was in turn linked to gold. As central banks began to build their reservesover time, these dollars were redeemed for gold, dwindling the U.S.’s stockpile and igniting concernsabout the stability of the U.S. dollar. In 1971, U.S. President Richard Nixon shockedthe world when he de-linked the dollar from gold. From there, free floating exchange rates wereborn, meaning exchange rates were no longer fixed to gold and were determined bymarket forces instead. Despite periods of market volatility and theinflation that followed, the U.S. dollar has remained the world’s reserve currency. Its sheer volume and America’s efficientbanking system made the notes more convenient and cheaper to trade than other currencies. Today, the vast majority of foreign exchangetransactions are done in U.S. dollars with no other currencies coming anywhere near that. In recent decades, the U.S. has even beenaccused of “weaponizing” its currency for strategic and geopolitical influence. One example cited by critics was the Trumpadministration's sanctions on North Korea and Iran, which included forbidding them fromusing the dollar in trade. Some economies are so reliant on the Americannotes, that they’re even commonly used in day-to-day transactions. At ATMs in Cambodia, you can withdrawthe greenback from the machines. On a global scale, you’ll find commoditieslike metals, energy and agricultural goods are usually traded in U.S. dollars. Here’s an example of how the U.S. dollarinfluences everyday business deals. Let’s say a jewelry company in India wants to sellits products to a Canadian department store. If the Canadian retailer tries to pay in Canadiandollars, the Indian jeweller is likely to say, “I don’t know how much this is worth. And I certainly can’t use it in India.” That department store, meanwhile, could alsoargue that the rupee won’t go very far in Canada. So, they’re both likely to transactin U.S. dollars instead. Those dollars will then be exchanged intorupees in India. Add together the number of transactions happeninglike this every day and, well, that’s a lot of greenback entering foreign economies. So we’ve established that the U.S. dollaris stable. But you might be thinking, what aboutother currencies that are stable too like what about the Swiss Franc or the Singaporedollar, both of which come from politically and economicallystable countries too. And yes, while those are fair points, thetruth is, those countries just have far less influence and economic power. Switzerland’s population is a mere 8 million,while the U.S. has more than 332 million. Just look at central banks’ foreign exchangereserves worldwide. While the majority of currency reserves are made up ofU.S. dollars, the euro makes up nearly 21%, the Japanese yen makes up nearly 6%and the pound sterling makes up nearly 5%. So, could any of these other currencies givethe dollar a run for its money? For years there have been calls for an alternativereserve currency, ranging from countries like China and Russia to intergovernmental organizationslike the United Nations. In recent years, some central banks have addedthe Chinese yuan to their reserves. The cloud of U.S. sanctions has also prompteda desire for some countries to bypass dollar-denominated trading. In 2018, Germany’s foreign minister wrotein an op-ed that it is “essential that we strengthen European autonomy by establishingpayment channels independent of the U.S.” And some are hoping the world’s future reservecurrency won’t be tied to a national government at all. They see cryptocurrencies, such as bitcoin,eventually overthrowing the dollar. But, even so, any change in the U.S. dollar’sstrength certainly wouldn’t happen overnight. Despite calls for an alternative reserve currency,it’s still hard to imagine any country capable of taking the mantle from the U.S.as the global currency anytime soon.