The US dollar has been in circulation since the 1600s before America became the United States. When the dollar first started circulating, the United States was still a collection of colonies that relied on various monetary standards. Nevertheless, the paper dollar was first used in the Massachusetts colony to bankroll the military. Soon after its introduction, other colonies started to use this paper currency as a substitute for other unpopular monetary exchange systems. The official use of the dollar as the US currency was authorized by Congress in September of 1786 (Eichengreen and Flandreau 57). The political and economic environments of the early United States were instrumental in fuelling the dollar’s international status. The US dollar is a major international currency that is used in commodity markets throughout the world. Consequently, it is common for most international companies to list their prices in terms of dollars. The status of the US dollar as a reputable international currency is dependent on various factors and historical facts (Odell 65).
The US dollar is the pioneer reserve currency in the world. It is also important to note that most of the physical US dollar currency is held by various countries around the world. The position of the US dollar as a major international currency is subject to complex economics (Cohen 13). For instance, most of the other global currencies would not be able to maintain the balance in trade deficits as a result of the currency’s international demand. The international demand for the US dollar “allows the United States to maintain healthy trade deficits without leading to a depreciation of the currency” (Cohen 14). Consequently, the US dollar has always been the subject of scrutiny by economists across the world. In recent times, the Chinese authorities have called for a viable alternative to the US dollar as the global currency. The Chinese economists have cited the risks that are associated with having a single dominant currency as a reserve currency (He and McCauley 12). The US dollar jointly serves the role of the reserve currency with the Euro. Some critics have faulted the Chinese claims about the volatility of the US dollar and they have instead attributed these claims as retaliation to the Americans’ call for the revaluation of the Chinese Yuan. However, the head of the Federal Reserve has admitted that there are plans for the Euro to become the most dominant currency in the reserves.
The strength of the US dollar against other international currencies is often measured by an index. The US dollar index measures the strength of the dollars against other dominant international currencies and monetary units from the United States’ oldest trading partners. As recently as March 2015, the strength of the US dollar was considered to be too much for the stability of most of the other global currencies (Aglietta and Coudert 12). Consequently, experts warned that the unprecedented strength of the US dollar throughout the year could lead to a global currency crisis. In the exchange markets, the US dollar is a regular feature in the standardization of foreign currency. Therefore, some countries have reevaluated their currency such that they have an exchange ratio of 1:1 to the US dollar. Some of the countries that broke away from the United States have continued to use the dollar as their official currency. The Euro remains to be one of the most viable alternatives to the US dollar in terms of exchange rates (Eun, Kim, and Lee 100).
Aglietta, Michel, and Virginie Coudert. “Currency Turmoil in an Unbalanced World Economy.” Cepii Policy Brief 5.08 (2015): 12-14. Print.
Eichengreen, Barry, and Marc Flandreau. “The Federal Reserve, the Bank of England, and the rise of the Dollar as an International Currency 1914–1939.” Open Economies Review 23.1 (2012): 57-87. Print.
Eun, Cheol S., Soo-Hyun Kim, and Kyuseok Lee. “Currency Competition Between The Dollar and Euro: Evidence from Exchange Rate Behaviors.” Finance Research Letters 12 (2015): 100-108. Print.
Cohen, Benjamin J. “The Benefits and Costs of An International Currency: Getting The Calculus Right.” Open Economies Review 23.1 (2012): 13-31. Print.
He, Dong, and Robert McCauley. “Eurodollar Banking and Currency Internationalization.” BIS Quarterly Review, 6.1 (2012): 11-14. Print.
Odell, John. US International Monetary Policy: Markets, Power, and Ideas as sources of change, Princeton: Princeton University Press, 2014. Print.