It is not uncommon to see U. S. Dollar (USD, for brevity) notes in
the country you live in. Regardless of the country you are in, the USD
is found engrained in the country's economy. Although, officially, the
USD is not a well-documented currency, unofficially it most certainly
is.
Why is USD used so widely all across the globe?
1.
Stability- One of the main reasons why dollar is rampantly used
globally is because of its stability. Business is always easy to do when
a stable currency is used.
The USD has
never been devalued. Meaning, the USD has never been deliberately
adjusted downward in respect of some other currency. Devaluation of the
currency, thus makes other currencies relatively stronger.
For example, if yesterday 55 Indian rupees(INR) bought you 1 USD and if INR is devalued, then it will take more than 55 INR to buy 1 USD. Thus, the USD becomes relatively stronger than the INR.
Therefore, devaluation of currency makes foreign products relatively more expensive, thus
discouraging imports. This helps a lot in reducing trade deficits. Trade deficit is the amount by which the cost of a country's imports exceeds the value of its exports. If imports are costlier, there will be lesser imports and thus maintaining a balance between country's imports and exports.
Dollarization means usage of USD in parallel to or instead of the national currency. Unofficial
dollarization is so dominant in some countries, that it would be
rare to see their national currency in use. And once this happens, it is
almost impossible to reverse.
According to a research, 40-60% of USD are used outside the United States.
2.
World War II- There is no such thing as a "World Currency", but since
the World War II, the USD has been a dominant currency all across the
globe. There was a time when all the currencies were backed by gold
reserves of equal value. In simple terms, gold was the standard by which
all the currencies were measured. After World War II, the USA became
the most dominant economy of the world and caused global expansion. Global expansion is to grow a country's business in many other countries. It also includes investing in foreign markets. This
global expansion was so large that the banks could not hold so much of
gold to back the printing of new currency. Thus, the USA eliminated this
gold standard and starting printing USDs in order to finance the global
expansion even further. Other countries followed what this dominant and
large economy chose to do and also started to waive off the gold
standard. This is one of the reasons why the USD became dominant and
almost all commodities were quoted internationally in terms of USD.
As the USD has started
to show signs of instability, it is a reason why the world is not
divided into various parts. One part uses American dollar. One part uses
Euros and the other part is starting to use the Japanese Yen, as it is
starting to prove its worth in the international market. Due to the rise
of other currencies like the Euro and the Yen in the international
market, it is impossible for any one currency to be termed as a global
currency.
In light of the
explanation above, the USD retains its status as an unofficial global
currency, as it certainly is stronger than the rest of the currencies as
of today. Tomorrow,
maybe it will be replaced by the Euro or the Yen, or maybe the USD will never take a step down. Economy related to currency usage is
quite deep and the factors that are to be considered in changing a
currency's status are infinite.
