While the first US Dollar wasn’t printed until 1914 (following the formation of the Federal Reserve Bank the previous year), the greenback has since become the world’s dominated and most widely traded currency in an incredibly lucrative market.
Interestingly, the relentless rise of the USD has much to do with the role that America played in both world wars, by providing goods and weaponry to the Allies and creating a significant debt that was subsequently paid in gold.
We’ll explore this history in further detail below, while asking how this impacts on the contemporary forex market and the business world as a whole.
Why Is The USD One Of The World’s Strongest Currencies?
The US entered both world wars at a relatively late stage, although it played a key role in financing the Allies and providing them with much needed supplies prior to entering the second global conflict.
In the wake of the First World War, most international currencies were significantly devalued after the abandonment of the gold standard (which linked each fiat currency to the value of gold bullion). This was so countries could pay their mounting military expenses using printed money, driving widescale borrowing that sent price points spiralling.
However, the US was largely able to buck this trend, as it only entered the conflict in 2017 and managed to minimise borrowing when compared to its rivals. This left the dollar in a relatively good place and still tethered to the relatively stable value of gold.
As we’ve already touched on, the US spent much of the Second World War providing the Allies with crucial supplies, with the subsequent debt largely paid for in gold. This established the US as the world’s largest holder of gold, boosting the value of the greenback considerably in the process.
So, although the gold standard ended after the war, countries instead decided to link their currencies directly to the value of the dollar. This maintained the dollar’s defacto reserve status, which has remained largely in place to this day.
As a result of this, it’s estimated that more than 61% of all foreign bank reserves are now denominated in USD, while almost 40% of the world’s total debt is held in dollars.
The Liquidity Factor And The Impact Of The USD
Interestingly, the demand for the USD has grown to new heights during the last decade or so, following the 2008 global financial crisis that actually originated in the states.
This trend has been compounded by the coronavirus outbreak, highlighting the fact that the demand for relative safe-haven reserve currencies like the greenback tends to soar during times of socio-economic austerity.
This also highlights the incredibly liquid nature of the dollar, with companies, investors and banking institutions across the globe seeking out assets that can be easily bought and sold even in a depreciating market.
If you were to review the real-time forex market through a demo or corporeal trading account, you’d see that the USD continues to perform robustly against an entire basket of major currencies. This is despite occasional fluctuations, which may be caused by either negative data releases or domestic quantitative easing measures.
The liquid nature of the dollar is also appealing for businesses, and not only international ventures that operate within the North American marketplace.
The reason for this is simple; as holding a small reserve of US dollars can be seen as a viable investment for entrepreneurs, creating a valuable asset that can be sold or exchanged for alternative currencies at key times.
As for companies that operate in the US, it’s common for firms to build a strong pool of USD, as they look to purchase the greenback at the best and most competitive rate.