In a world of constant global money flows, one currency stands out from the others, the United States Dollar. Be it a money transfer from UAE to Kuwait, OMR to GBP currency exchange, or daily forex rate analysis, the dollar influences it all.
Movements in dollar values ripple through every transaction. So the question is, why does the USD hold such power? Why does a shift in the American economy affect the world’s exchange rates? It’s time to find out.
Dollar – The World’s Financial Anchor
The US dollar is not just America’s currency, it’s the centre of the global financial system. After World War II, based on the Bretton Woods Agreement, most world currencies were pegged to the USD, while the dollar itself was backed by gold.
Even after the system ended in the 1970s, the dollar continued to maintain its dominance. Over 80% of global trade and 60% of central bank reserves are held in USD.
Movements in dollar value create a ripple effect across most major currency values. Want to know why? Here are the reasons:
The Dollar Is the World’s Default Trade Currency
Oil, gold, and gas which are major global commodities, are priced in USD. Changes in the dollar value causes changes in the price of these commodities thereby causing fluctuations in the currency values of the countries purchasing these commodities.
Global Investors Treat the USD as a Safe Haven
During uncertain times, global investors rely on the US dollar. This increased demand for USD weakens other currencies.
US Interest Rates Influence Global Money Flows
As the US Federal Reserve raises interest rates, investors are more likely to move funds to the US for better returns. This increases demand for USD which in turn puts pressure on other currencies.
Many Countries Borrow in USD
Most developing countries take loans in dollars. When the dollar strengthens, repaying debt adds stress to their financial systems, often leading to weaker local currencies.
Central Banks Hold USD as a Primary Reserve
Most central banks hold large reserves in US dollars. Any change in these holdings, or in confidence toward the US economy, shifts global demand for the dollar, influencing the value of other major currencies.
The US dollar has great control over the exchange rates of other currencies. Why is that so? Here are the key reasons behind its global strength.
Large and Stable US Economy
The US economy is one of the world’s strongest, most transparent, and most resilient economies. As a result, global governments, banks, and investors consider USD as a trustworthy store of value.
Deep, Liquid Financial Markets
The US has the biggest and most accessible financial markets. Anyone can buy or sell USD assets easily, in huge volumes, without affecting prices too much. No other currency offers this level of liquidity.
The USD’s Dominance in Global Trade
To buy commodities such as oil, gold, natural gas, machinery, and electronics, which are priced in USD, countries need dollars. This forces other countries to hold and use more USD, strengthening its dominance.
Network Effect: Everyone Uses It Because… Everyone Uses It
Similar to platforms like Google, once the world adopts a system widely, it becomes very hard to replace. USD is deeply embedded in international trade, cross-border payments, forex markets, global debt, and remittances.
All the above mentioned factors keep the USD powerful.
Changes in USD values result in variations in the global currency values. Understanding the dollar’s behaviour helps you in the following ways:
This is especially useful for expats in the GCC and other countries who send money regularly.