Dollar Dominance

Dollar Dominance

Introduction

Dollar is widely regarded as the dominant reserve currency all over the world. It has maintained its status as a reserve currency and major currency for the international trade transaction settlement for many years despite its financial recessions. The reason Dollar became the foreign reserve currency in 1920 was the fall of Sterling's share in the global exchange reserves. It very soon materialized its dominance over other currencies and became the most acceptable currency because of its liquidity and frequent use (Cohen, 2009)

Discussion

The Dollar has a very critical role in the global trade and all the countries maintain Dollar reserves because value of their domestic currency is tied with the dollar's value. All the central banks and financial institutions maintain large reserves of Dollar. The dominance of Dollar can be judged by its share in the international trade and foreign markets which currently stands at 86% and is currently on the rise as the figure shows (Akram, 2011).

Initially both the Sterling and US Dollar were equally dominant but just before World War 2 foreign reserves in the shape of Sterling decrease and that of Dollar increases ad after the World War 2 Dollar capitalized its status as the number one reserve currency because of high economic growth and dollar production. The US economy has gained many benefits from the fact that dollar is the World's reserve currency such as insulation from the supply shocks, reduction in the transaction costs and also it helps in the international transition of US monetary policies.

At the moment the Euro can be considered the only competent competitor of dollar as 65% of the global treasuries are dollar denominated while 25% are Euro denominated. Almost all the countries have big exposure to the US T-bills and even if they start selling them, ...