Articles
Published on
November 10, 2023

Facts About USD

5
min read

The American Dollar, or USD, is the most widely recognised and influential currency, topping the list of the most traded currencies, with an average global trading volume of $6.6 trillion, nearly triple that of the runner-up Euro and its $2.3 trillion average daily volume.

Let's take a look at some facts about the world's most popular currency today!  

Key Takeaways:

  • The USD accounted for 88% of global FX transactions, and comprises 59% of all reserve currency holdings
  • $3 trillion worth of USD was printed in 2020 alone
  • The Bretton Woods agreement pegged the USD to the gold standard but it was dropped after 1971

The USD is the top global currency

As of 2022, the USD accounted for about 88% of global FX transactions, according to the Bank for International Settlements. This share has remained stable over the past 20 years, despite the rise of other currencies such as the euro and the Chinese renminbi.  

This is primarily because of the size and stability of the US economy, the deep and liquid US financial markets, and the widespread confidence in the USD as a store of value.

It means businesses need to be prepared to deal in USD, even if they are not located in the US. This is because their customers and suppliers are likely to be using USD, and they may need to take out loans or raise capital in USD markets.  

🔑  Read More: Foreign Exchange (Forex) Rates: How Do They Actually Work?

It is also the most widely-held currency

The USD can be said to be the global de facto reserve currency, comprising an estimated 59% of all global foreign reserves in 2022, making it a crucial contributor to global economic stability. Central banks worldwide hold USD as a safeguard for foreign trade and investment, tapping into these reserves during economic turbulence to bolster their domestic currencies. They also buy and sell US Treasury securities as part of their foreign exchange reserve management.

International trade and transactions frequently employ the USD for settlement as well, particularly in sectors like commodities, including oil, cementing its indispensable role in the global economy.

The US central bank, the Federal Reserve, has immense influence in maintaining the USD's international standing. It administers reciprocal currency arrangements, commonly known as swap lines, with foreign central banks to ensure sufficient USD liquidity during economic crises. By providing this liquidity, the Federal Reserve helps to steer the global financial system away from potential currency and market disruptions, and keep it resilient.

The Bretton Woods Agreement

The Bretton Woods agreement, established after World War II, played a significant role in the USD becoming the anchor currency of the international monetary system. This agreement pegged the value of the USD to gold at a rate of $35 per ounce. At the same time, other currencies would have fixed but adjustable exchange rates to the USD.

This established a robust fixed exchange rate system that boosted global trade and investment, fostering economic stability and cooperation among nations.  

However, the Bretton Woods system was ended in 1971 due to the US's growing spending and deficit in its balance of payments. More importantly, the US did not have sufficient gold reserves backing the amount of USD circulating across the world, resulting in the currency's overvaluation.  

Following this development, the USD became a fiat currency, which means it is not backed by a commodity, such as gold or silver. Nonetheless, the USD held on to its status as the world's leading reserve currency.  

🔑  Read More: Opening A US Bank Account Overseas: What Are The Alternatives?

The Federal Reserve increased USD supply in 2020

In response to the economic fallout set off by the COVID-19 pandemic in 2020, the US printed as much as $3 trillion in the span of just under 4 months. The US government used these funds to pump money into the economy via asset and bond purchases. The Federal Reserve's balance sheet grew from $4.16 trillion to $7.17 trillion as a result of this activity.

This massive injection of liquidity into the economy was led by the Federal Reserve as it worked to keep interest rates down and encourage people and businesses to continue borrowing and spending.

Though such actions were deemed necessary at the time, it raised concerns the long-term implications for the financial system. In the short term, the economic downturn and reduced consumer spending necessitated such a move.

The effects were not felt till much later. For one, the increase in money supply led to high inflation and rising consumer prices, peaking at 9.1% for the year ending in June 2022, although it has since gradually come down.  

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