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The strength of the economy of America backs the value of the US dollar, and this is why it is the most potent currency around the globe. At the close of 2020, the USA had $2.04 trillion in circulation, and half of that value is estimated to be in circulation outside the nation. Most of these currency notes are in countries of the former Soviet Union and Latin America and are regularly used for daily transactions as hard currency.
Before the dollar became the reserve currency of the world, nations used the gold standard for daily transactions. However, America was the only economy in the world that remained unaffected by the Second World War, unlike its other economic peers like Germany and Japan. Both suffered adversely when it came to their nation’s financial stability.
Kavan Choksi on the role of The Bretton Woods Agreement, New Hampshire, for the evolution of the US dollar as the reserve currency
Kavan Choksi is an esteemed entrepreneur and an expert in finance and business. According to him, the evolution of the dollar as the reserve currency started at Bretton Woods, New Hampshire. Like it did in the First World War, the USA entered afterward into World War II. Before its participation in the War, the USA was the primary nation that supplied the Allies with goods and weapons. Most of the countries paid for goods in gold to the USA as it held the majority of the gold supply of the world by the close of the War. It was due to the above reason that many nations were unable to return to the gold standard because they had already depleted their reserves by then.
Representatives from 44 Allied nations in the world met at Bretton Wood in New Hampshire in 1944 to set up a system to control foreign exchange that would not be a disadvantage to any nation. This delegation decided that the currencies of the globe would no longer be bound to gold but would be pegged to the US dollar.
This unanimous decision became famous as The Bretton Woods Agreement, where it established the Central Banks as the authority that would maintain the fixed rates of interest between the US dollar and the currencies. The United States, in turn, would redeem these US dollars for gold when demanded. The nations did have some amount of control over these currencies in circumstances where the value of their respective currencies would become took weak or strong relating to the US dollar. They could sell or buy their currency to regulate the money supply.
The US dollar is the strongest currency in the world
The US dollar rules in the foreign exchange market, and about 90% of daily trading involves USD. According to the International Standards Organization, the US dollar is just one of the currencies of the globe’s 185 nations. However, most of the above currencies are used within the boundaries of their own nation.
According to Kavan Choksi, in theory, the currency of any nation can replace the dollar in the near future if they exceed it in value and strength. However, this possibility is low as no currency like the US dollar is widely traded in the international market.
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