The US dollar is the global reserve currency used for financial transactions and international trade across the world. All of these transactions are settled in the respective cash of the issuer in the economy. Take, for instance, if a firm in India buys oil from Kuwait, it will pay for the transaction in rupees because this is the national currency of the country. Again, if Kuwait sells this oil to China, the transaction will be carried out in renminbi or the Chinese Yuan that the nation uses for the settlement of international commerce.
Kavan Choksi- the impact of oil prices in determining currency value
Business and finance expert Kavan Choksi says that oil prices play a significant role in determining the value of currencies across the globe. Along with oil, there are some industrial metals like aluminum and copper used for making consumer goods, and they have a very close relationship with the inflationary trends and economic growth across the world.
The historical significance of the US dollar in the global economy
Silver and gold were the traditional currencies used across the world for several centuries. In 1944, international leaders attended a meeting at the Bretton Woods Conference to establish a system for fixed currency rates of other prominent currencies pegged to the US dollar. The agreement resulted in the other nations holding the US dollars as a global reserve currency in place of gold.
The economy of the USA was not affected by the Second World War
During this period, the conversion rate of gold was $35 for one ounce. The main reason for these nations to agree to make the US dollar the global reserve was because the economy of the USA and its economic output were not affected by World War II like its economic peers Japan and Germany. The USA held the most gold after the war, and it could provide a constant supply of gold, making it the hub of trade and economy after the end of the Second World War. The nation never wanted another war, and so it started to build a robust military presence to deter the Soviet Union during that period.
Why is the US dollar increase in value?
The US dollar is heading higher, and there are several reasons for this. The US dollar index is now at multi-year highs, and the tapering policy of the Federal Reserve triggers the increase in its value. This policy had restricted the flow of easy money into the economy since 2013 when Ben Bernanke began talking about the reduction of asset purchases. After he assumed office in the year 2006, the Fed purchased $1.7 trillion worth of assets to trigger growth in the economy, manage the low rates of interest, and boost market liquidity.
According to Kavan Choksi, the US dollar is a powerful currency, and it is most likely to appreciate in the following few years. Due to the above factors, there are several ways for one to invest in the dollar. For instance, you can buy bonds, ETFs that are denominated in US dollars, and stocks.
