The U.S. dollar is the world's primary reserve currency. This means that central banks and governments around the world hold a significant portion of their foreign exchange reserves in USD. As of my last knowledge update in January 2022, it comprised approximately 62% of global official foreign exchange reserves, making it the most held reserve currency. Central banks and governments often choose to hold USD because of its stability and widespread acceptance in international transactions.
Universal Acceptance:
The USD is widely accepted and used by individuals, businesses, and governments worldwide. Its universal acceptance makes it a preferred choice for cross-border transactions, trade settlements, and as a medium of exchange. This wide adoption simplifies international trade and finance.
Largest Economy and Financial Markets:
The United States boasts the largest economy globally, contributing significantly to the USD's strength. The country's financial markets, including the stock market and bond market, are the largest and most liquid in the world. This attracts investors and institutions seeking opportunities for investment and portfolio diversification.
Political Stability and Military Power:
The U.S. has a stable political system and is recognized as a military superpower. Political stability is crucial for the confidence of investors and foreign governments in the currency. The military strength of the U.S. further enhances its global influence.
Petrodollar System:
The USD's role as the primary currency for oil transactions is a fundamental aspect of its dominance. Most global oil transactions are priced and settled in U.S. dollars, a system often referred to as the "petrodollar." This means that countries must hold USD to purchase oil on the international market, creating sustained global demand for the currency.
Cross-Border Transactions:
Many international transactions, including trade in commodities, are conducted in USD. As you mentioned, if a country wants to engage in cross-border trade involving USD-denominated goods or services, it typically needs to acquire USD. This practice underscores the USD's role as a medium of exchange in global commerce.
In conclusion, the U.S. dollar's preeminence in the world economy and financial system is multifaceted. It is driven by factors such as its reserve currency status, universal acceptance, the size of the U.S. economy and financial markets, political stability, military influence, and its pivotal role in international trade, particularly in the pricing of commodities like oil. As a result, the USD remains a focal point for investors, businesses, and governments worldwide.
