Why is the US Dollar Considered World's Reserve Currency
The US dollar is considered a global currency as it represents almost 85% of trading volume in the forex market. Hence, the US dollar has become a global currency.
Brent Woods New Law
With the exception of the United States, major countries that participated in World War II sustained terrible damage to their mainland infrastructure. With the exception of one occasion (the Japanese attack on Pearl Harbour), the US was the only country that did not sustain any significant damage to its mainland.
The key infrastructure of every other country had to be rebuilt since their economies were in utter disarray after the war. In exchange for the support, it gave to them, some countries also paid the United States. Before Bretton Woods, the majority of nations used the gold standard. This meant that each nation promised to repay its currency for its equivalent in gold. Each party pledged to redeem its currency in US dollars following the Bretton Woods Agreement, but not in gold.
How Dollar Became Powerful
Three-fourths of the world's gold supply was held by the US. There wasn't enough gold in any other nation to serve as a replacement. As a result of this arrangement, the US dollar rose to prominence and all other major currencies were permitted to fluctuate against the US dollar.
New Major Reserve Currency – Dollar
The term "reserve currencies" refers to those that a government or central bank holds in adequate numbers. By the end of 2018, the US dollar had made up roughly 62% of the world's currency reserves compared to other currencies like Euro, Japanese Yen, and Pound. The reserve currency can be used to buy commodities like oil and gold or to carry out foreign exchange operations on behalf of the local currency of the central bank.
Rise in US Dollar’s Value
Due to the Bretton Woods agreement, many developing countries around the world had taken on debt from the IMF and the World Bank deals in US dollars. As a result, the nations' loan repayment would also be made in US dollars. Therefore, any attempt to repay the current loan or stabilise the national currency would require trading in US dollars on the open market.
Hence, as long as the considerations are still in effect, the US dollar will continue to hold strategic importance around the world.
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