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Kavan Choksi – How Did the US Dollar Become the Global Reserve Currency and How is it Rising in Value?

In: Business

If you look at the US Dollar today, you will find that it is one of the globe’s strongest currencies. It was the official currency of the USA and other nations, though its history is deeply rooted in the nation, as the dollar was printed in 1914.

Kavan Choksi – The history of the dollar as the Global Reserve Currency

Kavan Choksi is an esteemed name in the field of finance and business. According to him, both silver and gold were once the traditional currencies in the world, and they were used for many centuries. In 1944, leaders of the world at the Bretton Woods Conference decided to make a system for fixed exchange rates of other prime currencies that were pegged to the USA dollar. This resulted in the other countries keeping dollars in place of gold as the reserve currency.

Reserve currencies and their nature

Reserve currencies are deployed for global trade and other financial transactions, and they are settled in the currency of the respective currency. The following example can explain this-

If a firm in India was to buy oil from Kuwait, it would use the rupee, the national currency, for settling the trade. Again, if Kuwait sold oil to China, the price would be settled in renminbi (the Yuan Chinese) that China used to settle global transactions.

In the world, oil is a commodity in huge demand, and its price plays a huge in the determination of currency values. Along with this, metals like aluminum and copper are used for manufacturing consumer goods. In short, these metals have a very close relationship with inflationary trends and economic trends across the world.

Reasons for the dollar going higher

If you take a look at the dollar’s value today, you will see it is at a multi-year high. There are many reasons for the above, and one of them is the tapering policy of the Federal Reserve. This policy refers to the curbs the flow of easy money to the market. This started in 2013 when talks were being made about the reduction of asset purchases. In 2006, the Federal Reserve purchased $1.7 trillion of assets to promote economic growth in the market, manage low-interest rates, and increase liquidity.

The dollar still remains the globe’s reserve currency. Central banks across the world held 59% of their reserves in US dollars during the 4th quarter of 2020 as per the IMF or the International Monetary Fund. Several reserves are in US bonds and cash-like US Treasuries. The dollar-denominated debts outside of the USA still continue to rise, with their levels reaching about $12.6 trillion in the middle of 2020.

According to Kavan Choksi, the USA dollar is a potent currency, and it is likely to grow in value in the following years. This means there are many ways for investors to invest in the dollar. One can buy bonds, stocks, or EFTs that are dominated by USA dollars.

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