Dollar considered the base currency

Why is dollar considered the base currency in foreign exchange?

Why dollar is used as a standard measure of Foreign exchange

Nowadays Dollar dominates the world market as the new exchange currency and it has spanned itself in almost all businesses related to foreign exchange. Now, to understand as to why dollar has become the standard measure of Foreign Exchange, one must know something about exchange rates and the factors which may have impact on it. As the name says, foreign exchange, it’s the exchange of one currency for another, and so the foreign exchange works as a facilitator in dealing currencies of other nations, now coming to exchange rates, it means the current value of any currency for the sole purpose to exchanging with another. The foreign exchange market is responsible for determining the exchange rates.

Now we shall see a brief history regarding the reason as to why dollar became a standard measure. Initially the exchange rates were set on Gold Standards which meant that each country would promise to redeem their currencies according to their value in gold. Few years after that many countries met at the Breton Woods Conference. After the Bretton Woods Conference was over, an agreement was signed, in which majority countries in the world had “pegged” their currencies exchange rates against United States dollar, reason being that the US had the largest gold reserves at that time and hence the dollar’s value was backed by the gold, which resulted in getting them a fixed amount of gold whenever they exchanged it. This phenomenon single handedly made US Dollar so strong that it started its dominance over the Foreign Exchange Market.

But soon after that following in 1970s countries started asking US for gold owing to which the US gold reserve started depleting at a faster rate and hence the then US President Richard Nixon untied the controversial gold with dollar regime. Now even though the countries were free to trade with any currency they wanted, they continued trading with dollars because at that point of time US had become the world’s foremost economic superpower and since then US Dollar has dominated in major foreign exchanges. The effect that dollar still has so much power could be understood by the fact that few countries like Panama and El Salvador have not only pegged their currencies against US Dollar but they even stepped further by completely abolishing their own separate currencies and have adopted US Dollar as their de facto currencies.

Ever since the existence of dollar dominance in the world market as the main exchange currency only two times have it faced a serious situation when its dominance was seriously challenged. The first was long back in the period 1980s when the Japanese currencies were started to be used as an alternative to US Dollar as the major exchange currency but it was not able to sustain itself as the usage slowly stopped owing to the heavy recession that struck Japan and thus ending the increasing Yen dominance. The second instance was more recently when Euro was introduced as the official currency of the Eurozone which comprised of the European counties like Germany, France and Netherlands. Now Euro was on the verge of breaking the US Dollar regime but it failed to do so because of the Eurozone crisis.

The reason dollar will continue to be the standard measure of Foreign Exchange is due to the fact is that there is better option. Be it any currency of any country none can match the power dollar yields. If you try and look at the alternatives you would find that the Euro is no good as of now as it shows weakness credits to the Greek bailout problems, countries like Switzerland and Japan are overprotective of their currencies and don’t want at any cost to make them easily available in the market as it would create an import problem for them. The Asian currencies like Rupee etc. are really heavily dependent on external agents, so it leaves United States of America the main provider for a currency that is safe to invest and gives maximum possibilities to grow.

As for now it’s not wrong to say that the US Dollar is the strongest currency in the world as related to foreign exchange thus being the standard measure of Foreign Exchange.

Click here for government certification in Accounting, Banking & Finance

1 Comment. Leave new

Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.

What is IMF and the world bank ?
A Very Brief History Of The Eurozone

Get industry recognized certification – Contact us

Categories

Menu