Dollar as Reserve Currency of the World Benefits the U.S.

How U.S. Benefits From Dollar Being Reserve Currency of the World

Because the U.S. dollar is the world's reserve currency, we can borrow more cheaply than other countries. There is a great demand for our debt instruments by central banks and individuals because of the safety of our Treasury instruments. The U.S. Treasury market is also the world's largest and most liquid financial market.

Trade Finance

Trade finance is an area where the U.S. dollar plays a critical role. Certain commodities like oil can only be bought with U.S. dollars. Because the US is a major exporter of food, all of our commodities are priced in dollars, with the dollar's value being used as a benchmark for other currencies. Because of the stability of the dollar and the U.S., trade between companies in different currency markets is often made in dollars since it's the one currency trusted by most people.

Dollar Diplomacy

Given the importance of the U.S. dollar, we can use what is informally known as "dollar diplomacy" to help our friends in many ways, including low-interest loans, trading concessions, most favored nation status for tariffs, favorable terms to purchase U.S. weapons, and holding their central bank's currency reserves.

U.S. Treasury Sanctions Block Financial Transactions

Conversely, we can and do confound our enemies through our ability to control who gets to use U.S. financial markets and payment networks. After the Russian invasion of Ukraine, we imposed "blocking sanctions" on the largest Russian financial institutions. Because of these sanctions, Russian banks cannot process payments through the U.S. financial system, which is the most efficient in the world.

Further, in concert with our allies in the E.U., we blocked Russian banks from using the SWIFT network to transfer or receive assets from its 11,000 member banks. [1]

No Replacement Exists for the Dollar As a Reserve Currency

The BRIC countries (Brazil, Russia, India, and China) are endeavoring to create a basket of their mixed currencies to replace the dollar. So far, they have yet to be successful.

Countries and individuals believe the U.S. is the most capable and reliable global finance nation. We have the largest economy and the strongest military and will always honor our obligations. Because of these many reasons, the dollar continues to be the world's reserve currency and will continue until something replaces it.

How the U.S. Dollar Became the Reserve Currency of the World

Of the three great powers who fought the Nazis and the two who fought the Japanese, only America emerged from victory in World War Two with a strong and growing economy. There had been no physical damage to the nation, and individuals, corporations, and the government had accumulated capital to build millions of homes and automobiles and launch a consumer economy. The war had beggared the two other great powers, the Soviet Union and Great Britain.

Before WWII, the British pound had been the world's reserve currency. Unfortunately, at the war's end, Great Britain had become virtually bankrupt, relying on dollar loans from the U.S. Government to stay afloat. Sometimes, winning a war takes everything you have.

Resource

[1] https://home.treasury.gov/news/press-releases/jy0608

Contributing Writer: Subject Matter Expert Charles McCain

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