US Dollar: Making of The Most Powerful Currency

US Dollar is regarded as the world’s most powerful currency. All other currencies are traded or measured in relation to the USD.

The US Dollar is more than just a tool of exchange. It can be denoted as a weapon of control. Through its influential powers, it tends to control economic activities around the globe.

How the US Dollar became the strongest currency

We have witnessed other currencies falling in comparison to the US Dollar. It invokes a question, How did the Dollar become so big?

  • Till 1914, all currencies were linked to the value of Gold. Countries had to maintain the gold reserve equivalent to the amount of money to be minted.
  • During the First World War, European Countries exhausted their gold reserves.
  • The lack of gold diminished the power of the pound. This led to an economic slowdown.
  • The USA proposed to link Pounds to Dollars, which was already linked to gold reserves. Europe agreed to the proposal.
  • The USA owned 75% of the World’s Gold reserves which provided it with huge monetary power.
  • In 1944, Bretton Woods Agreement was made which concluded that every currency can be linked to the Dollar since it is a stable currency.

In this way, the US Dollar became the World’s Backup currency. The US Dollar became stronger than all other currencies just next to gold. Consequently, many Central Banks keep more than half of their reserves in the US Dollar.

The Abuse of Power

The USA became a dominant country and all the nations believed in the US Dollar. Its superiority gave US Government some exclusive benefits over other currencies. Hence, in 1971, President Nixon announced the discontinuance of gold reserves as a backup.

This made the US Dollar even more powerful than gold. As per new standards, if any country has to deal with another country, both countries would convert their currencies into the US Dollar.

The dominance of the USD has 2 disadvantages for other countries. For every transaction:

  1. Both parties have to pay conversion charges.
  2. Both parties are dependent on the policies of the U.S.

US Government can control through sanctions which country will be allowed to deal in US Dollars. This provides influential benefits to the USA. The USA used these powers against Russia pressurising it to drop the war against Ukraine.

How is the USD getting stronger?

The U.S. dollar hit a two-decade high on Monday, responding to Federal Reserve Chairman Jerome Powell’s comments that the central bank will continue to tackle inflation “forcefully”

As of 23rd October 2022, USD has surged to a record high. The rise in the USD is due to the following factors:

  • During the COVID pandemic, US Government agreed to provide economic stimulus to the people.
  • Under CARES Act, every adult and every child were given $1200 and $500 respectively.
  • This led to the prediction of inflation by experts in 2020. Inflation in May 2022 was at 40 years high.
  • To combat inflation, the Fed decided to curb consumer demand by increasing interest rates. Increased rate of interest leads to lower disposable income which reduces consumer demand.
  • Increased interest rates lead to lower currency supply which raises its value.

The USD will keep getting stronger with further hikes in interest rates. Other currencies have to suffer the effects of currency depreciation due to the domineering of the Dollar.

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