Do you know why US Dollar is the most dominant currency in the world?
In fact, most powerful currency as of now.
Any nation’s currency becomes powerful when its economy is booming.
And we all know how strong the US economy is.
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The US Dollar started to dominate the global market just after World War II.
At that time, it was the giant economy in the world.
So how did the US Dollar become the king of currency?
The US $ is the most dominant currency in the world. Moreover, the world economy is so dependent on the US economy that a minor fluctuation here and there creates a ripple effect all across the world.
That’s why the global stock markets react when every time the Central Bank or Feds increase or decrease the interest rates.
So, when US Stock Exchanges go up and down, it goes on to create headlines in every single news media.
Even a retail trader sitting in India follows the movement of Dow Jones or Nasdaq before he invests.
Do you ever witness such kind of dependency on the US Dollar or US stock markets?
Stock markets across the world are just dancing with the tune of America’s economy.
Most importantly the life of billions of people gets affected. On top of that, because of the dollar, the United States is able to practice its superpower to such an extent that it could literally uplift or crush the economy of most countries within a fortnight.
So, the question is how on earth did the US dollar become so so powerful?
What exactly was the strategy deployed by the presidents of America, that gave unprecedented power over the global economy?
Way back in 1940, when the world had already witnessed World War I and World War II was at its peak.
We all know the British Empire was the superpower during that time with its vast colonies all across the world.
However, by the time they fought World War I and World War II, their economy was crushed and so their wealth deteriorated significantly.
In fact, by 1920 that is right after World War I itself, the condition of the British economy was so bad that their debt has risen to 7.8 billion pounds from just 0.62 billion pounds.
This kind of economic crisis not only happens with the British Empire but with all major countries across the world including France and the Soviet Union.
However, the catch over here was that the United States government outsmarted everyone.
Instead of participating in war, the US first engaged itself as war merchants.
Now, what does this mean?
While all the big empires were busy fighting the war and dedicating all their manpower and resources towards warfare, the US used all of its capital and manpower into becoming the major supplier of Cotton, Wheat, Brass, Rubber, Automobile Machinery, and many other goods to the world.
As a result, the United States experienced one of the greatest economic booms in the world. The total value of US exports grew from just 2.4 billion dollars to 6.2 billion dollars.
And the same thing happened in World War II also wherein the United States became a war merchant and entered the war only after Pearl Harbor.
So, the catch over here is that by conducting business at the time of wars, the United States made huge money while every other country’s economy was devastated.
US gold reserves rose to 20 thousand tons from just 2 thousand tons in just 4 years from 1910 to 1914.
This is when the US played its trump card and took the opportunity to gather 44 countries across the
world to sign something called the Bretton Woods Agreement in 1944.
In this agreement, 44 countries agreed to peg their currency against the Dollar, and the US dollar was ultimately paid to gold.
Now you may be thinking, why did these countries sign the Bretton Woods Agreement, and what exactly was their benefit?
Well firstly, the Bretton Wood agreement said that they would back the dollars with gold.
So, for instance, one ounce of gold would be worth $35. That is 28.35 grams of gold would be worth $35.
That means if you own the dollars, then you can redeem their value in gold just like exchanging the dollars with gold.
This way it became extremely convenient for any countries to trade with each other without trusting each other’s government.
Suppose, when Mexico got 1 Million Dollars from Argentina even if Mexico did not trust Argentina, they know for sure that the 1 Million Dollars that they got could be exchanged for gold with the US.
So it was definitely worth otherwise if they do trade with Argentina in Peso today.
Maybe Argentina’s currency might be worth buying one gram of gold today but the next week itself if Argentina prints more money then do you realize what would happen?
The entire value of trade with Mexico would actually collapse. Moreover, if Mexico wants to use Argentina’s currency and if other countries do not trust Argentina’s economy then that money again could not be used for trade.
However, if the same transaction happened in dollars, the USA guaranteed the value of Dollars with gold.
So you could trade with any country with the US$ and also get an assurance that you can use it to
trade with any other country.
Secondly, the Bretton Woods agreement led to the formation of two giant organizations which are none other than the World Bank and the International Monetary Fund (IMF).
Since most of these countries were devastated by two wars, they desperately needed loans to rebuild their economy.
So, with the funding of the USA, the World Bank issued huge sums of loans to help these countries to get back on track
Thirdly, these countries had the benefit of IMF facilities. So while the world bank gave out long-term loans for development, IMF keeps track of the global economy.
It assists policymakers and most importantly it lends money to countries with balance of payment difficulties.
So, this is the reason why even today, countries like Pakistan and Sri Lanka are seeking help from the IMF to come out of economic crises.
This is how the Bretton Woods agreement sealed the importance of the US Dollar and gave the United States huge leverage over other countries.
That was the first phase of the strategy that made the US $ the most dominant currency in the world.
The second phase of Dollar dominance was established with oil.
Way back in World War II, while Russia, Britain, and the US were busy fighting Germany, Italy, and Japan, Saudi Arabia was just chilling in the desert as they did not engage themselves in the war.
In fact, they didn’t even know that they were sitting on the largest black gold mine in the world.
During this time, the American and British companies were serving the entire world with oil. Only these companies actually had both the technology to extract the oil and the acumen to use it for world trade and development.
This is when in 1938, an American-owned oil well in Saudi Arabia drilled into a huge source of oil reserve. Meanwhile, the Saudis were not at all rich back then because they had just started producing
oil.
However, during the war, Italy dropped multiple bombs on Saudi to target the American facilities in that region. Because of this attack, the Saudis struggled to produce oil at full capacity.
So the Saudis desperately needed more protection. This is when Franklin Roosevelt who was the president of the USA saw the insane levels of development all across the world during the war.
He realized that the key to this and the next five decades of world development lies in just one commodity and that is oil.
So you know what, he held one of the most important meetings in world history with the king of Saudi. That change the fortunes of the US Dollar forever.
You might be thinking exactly what was this deal.
Very simple, the USA offered to protect Saudi Arabia from any future attacks and provide them with all military equipment. In exchange, he asked the Saudi King to sell oil only in US Dollars.
Guess what? As it turns out the Saudi wealth, that the Americans were digging was the largest oil well in the world. From there onwards, the rise of the Middle East started and by the 1960s after OPEC, all oil exporting countries started selling oil in dollars.
Now the question over here is why was selling oil in dollars such a big deal and how did this make US $ the most powerful currency in the world?
The Dollar became the king of all currencies and this is the start of the third phase of the rise of US$.
Now, do you remember what the Betton Woods Agreement said?
And that is nothing but, if you trade in the US Dollar, the USA would redeem its value in gold.
However, by the 1970s the US economy had reached such a pathetic state that the gold reserves had fallen from 22 000 tons in 1950 to just 10,000 tons in 1970.
This is because of multiple reasons like the Vietnam war, gold price hikes, US liabilities, and other factors.
At that time the USA no longer afford to keep exchanging gold for dollars due to the low gold reserves.
This is when president Richard Nixon declared a temporary suspension of the dollar’s convertibility into gold and the Bretton Wood system collapsed in 1973.
So, now all the countries were free to choose any exchange arrangement for their currency except pegging its value to the price of gold.
One of the most important factors for the value of a currency was not gold but its application.
What could your currency buy you in the global market and from which country could the US Dollar buy you is important.
Well, it could buy you the most valuable commodity of the century and that is oil. So most of the countries by default held onto their forex reserves in US dollars so that they could buy oil from the Arabs.
At the same time, other currencies like the Euro, Yen, and Yuan began to rise in the world market.
Moreover, European and American banks came up with something called the society for worldwide interbank financial telecommunications or the swift network to make trade payments.
Now you might be wondering how the hell that makes the US a superpower.
Is it just because these countries are using the US Dollar and just because they’re using the swift network to make payments?
Well, the answer to that lies in the working of the swift network. The Swift network usually involves 6 different entities. These are as follows:
China’s Trader,
Chinese Bank,
US Bank No 1
US Bank No 2
Foreign Bank and
Foreign Trader
Now the Chinese bank will have an account in US bank No 1, where it has its money deposited in dollars.
Similarly, the Foreign bank will have a bank account in US bank No 2, where again they will
store their money in US dollars.
So, just like the Chinese banks and Foreign banks from all across the world have their bank account with the US banks wherein they have their money stored in dollars in order to make a trade
payments in US $, this is the reason why you will see that almost all the banks in the world have an account with a US bank.
This is how the swift network works and just like Indian and Sri Lankan banks, today more than 200
countries trade with US dollars and have their forex reserves with American banks.
Moreover, if a country has 100 billion dollars in forex and spends only 20 to 30 billion dollars in imports and exports, it would still have 70 billion dollars in surplus.
right?
So, guess what?
Instead of savings, we prefer to invest our money in the stock market for a better return.
So, these countries invest their excess foreign reserves in US treasury bonds. Just like government bonds, this is a mega bond whereby countries are lending billions of excess dollars to the US and expect a return after maturity.
Do you know how much this amount is?
It will just freak you out.
As of January 2022, Japan had 1.3 trillion US dollars in US securities.
China holds nearly 1.06 trillion US dollars and the UK holds 608 billion dollars.
In total, the US has seven trillion dollars held by foreign and international investors as of September 2021.
This is insanely huge money which is more than the total GDP of Russia, France, and India alone.
So, with this insane amount of cash US has an unfair advantage to build its economy and develop its military.
It extends loans to other countries and funds the World Bank and eventually, commands extraordinary power over other countries.
On top of that, if any country does something that they do not like, they could just freeze their forex accounts.
Moreover, they may prevent them from trading with other countries.
This could practically destroy a country’s economy within a fortnight.
So, this is one of the most important reasons why the united states are hailed as the most powerful country on the planet.
Just like other countries, even India needed US dollars. The Indian Rupee that had artificially been packed to the dollar at 17.5 rupees pre-liberalization quickly and steeply got devalued.
What’s interesting to note is that since 2019, the value of the Rupee has gone down from 70 to 80 Rupees per USD but India’s dollar reserves doubled to over 642 billion dollars as of September 2021.
The rupee will always have a weakening bias against the dollar as India is a current account deficit
country.
It means the demand for US$ is constantly outstripping the supply. So, as an investor, you can actually diversify your investment portfolio to include US stocks in your portfolio.
You can easily do that through Vested, Indmoney, and Groww. It gives you access to more than 1500 stocks, ETFs, and many more.
Apart from that, you can also invest in US stock markets through capital.com, Pepperstone, TradeStation, Currency.com, and many more.
It also allows you to do fractional investing as in you can buy shares of Apple, Google, or Tesla for as little as one US dollar.
The best part is that you get the lowest exchange fees.
So, this sounds useful to you, and start your investment journey with u.s stock.
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