The Dollar World's Reserve Currency

THE DOLLAR: THE
WORLD’S RESERVE
CURRENCY
Group 4
Leader: Lachica, Chelsy Mariam V.
Members: Mark Angelo Patenia, Mark Angelo Lopez, Kailyn
Paz, Lhedine Delos Santos
HOW DID THE US DOLLAR BECOME
THE WORLD’S RESERVE
CURRENCY?
 The dollar became the global reserve currency following
World War II thanks to the 1944 Bretton Woods
Conference, which established the IMF and World Bank.
The Bretton Woods exchange rate system pegged
currency values to the dollar, which was convertible to
gold at $35 per ounce. This was intended to prevent
currency wars during the 1930s.
 However, by the 1960s, the US lacked enough gold to
cover the dollars in circulation, raising fears of a run that
would deplete gold reserves. President Nixon suspended
the dollar's convertibility to gold in 1971, effectively
ending the Bretton Woods exchange rate system. The
Smithsonian Agreement attempted to save the system by
devaluing the dollar and allowing for more volatility, but
it was short-lived. Today,
THE WORLD’S RESERVE CURRENCY
 The Bretton Woods Agreement established the US dollar
as the global reserve currency, backed by the world's
largest gold reserves. Countries accumulated US dollars
instead of gold reserves, purchasing US. Treasury
securities serve as a secure means of storing money. The
demand for these securities, combined with deficit
spending, caused the United States to flood the market
with paper money.
 Concerns about stability prompted countries to convert
dollar reserves into gold. President Richard Nixon
intervened, delinking the dollar from gold and
establishing floating exchange rates. As of 2022, central
banks held approximately 59% of their reserves in US
dollars, with the majority in cash or US bonds. Today,
about 60% of international transactions are settled in US
Dollars. Gold is priced in dollars, oil is priced in dollars.
 Most commodities are priced in US dollars. And when a
company buys goods in another country, they are often
bought in US dollars, no matter what currency that
country uses. This means that the entire world’s
economy is affected by the US economy and decisions
made at the US Federal Reserve. So how did this system
come about? Read along to learn about how the US
Dollar became the world’s reserve currency
 For centuries, countries used gold in international
transactions or tied their currencies to the amount of gold
in their vaults, a practice known as the gold standard.
The UK pound was the global reserve currency for many
years before abandoning the gold standard in 1931,
leaving the US as the primary reserve currency. During
WWII, many countries were forced to pay for goods in
gold, leaving their vaults empty, which strengthened the
US financial position.
 Delegates from 44 Allied countries agreed to peg their
currencies to the US dollar, allowing them to be
exchanged for gold. This resulted in the US dollar
becoming the world's reserve currency. The US ceased
converting dollars to gold in 1973, and its role as the
primary reserve currency allows the US
IMPORTANCE
 The dollar's status as the primary reserve currency for
the global economy enables the United States to borrow
more easily and impose harsh financial sanctions. Other
countries are starting to consider alternatives. Since the
end of World War II, the dollar has been the world's
primary reserve currency, and it is the most widely used
currency in international trade. The high global demand
for dollars allows the United States to borrow money at a
lower cost and use currency as a diplomatic tool, but
there are some drawbacks.
WHY THE DOLLAR REMAINS THE WORLD
CURRENCY
 While these economies may want to see the dollar's
dominance end, they are also facing significant
challenges. Calling for the end of the dollar's dominance
is, at best, premature. The global financial system is
based on the stability of the dollar and the United States'
large trade deficit. In essence, the United States exports
dollar stability for goods and services at lower prices,
thereby improving the welfare of its citizens. In
exchange, the major trading economies get to hold a
currency that is stronger than their own.
 Consider the Chinese yuan, which relies on the depth of
global liquidity markets based on the dollar to support its
currency regime. This reliance reinforces the dollar's
hegemony. In short, surplus-producing economies rely
on dollar-based demand from the United States to
compensate for their own low consumption and high
savings.
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