What is the advantage of the dollar being the world reserve currency?


What is the advantage of the dollar being the world reserve currency?

Dollar is the closest thing we have for an universal currency. it really eases the global financial transaction.

the catch? it gives united states an incredible leverage to basically create money out of nothing and overvalue its currency. this overvaluation makes the whole world subsidizes Americans for cheap imports. and the worst part, the world depends on dollar so much that anything happens in US domestic context will affect the rest of the world.

at the moment there is disadvantage for the americans other than expensive exports. even if the united states create 1 trillion import deficit, I don’t think it will affect much because it can always print money to pay its balance.

however, the system may collapse if another currency takes it throne and suddenly united states must pay its deficit by this currency. but probably will not happen in long time.

The advantages for the USA are quite obvious. For the rest of the world though the advantage is that unlike any other country the USA combines political stability with economic volume. This means there will always be enough dollars to buy and sell and that their value will not fluctuate too much in comparison to other options.

The disadvantage is that if your imports and exports are dollar denominated you land up being somewhat affected by internal monetary policy in the US (like interest rates) despite having no ability to influence it. Also because many other countries are so much smaller than the US they are affected disproportionately more.

Most of the large economic countries such as Hong Kong, China, Malaysia and Singapore hold their large deposits in terms of the Dollar. Due to its size and strength of the US economy, the dominance of the US financial market remains strong. So that the world thinks that the United States has the ability to pay its debts and hence the Dollar is considered to be the most redeemable currency. The US Dollar and the US government's treasury bonds are the safest assets in the world due to its stability and its risk-free nature.

Since the US has a stable political environment and almost all the transaction take place in Dollar most of the people prefer it so it is considered as World currency. It is also convenient for banks and firms to do cross-border business. As the US combines political stability with economic volume there will always be enough Dollars to buy and sell and the value of the US Dollar does not fluctuate a lot when compared to the other currencies

More than an advantage, there’s a convenience. Nations buy US treasuries because being the technologically most advanced and also the most resourceful nation, they trust that at some future date, the US will give them the goods-n-services equivalent of those dollars.

And the US does make good that promise. Middle-east nations buy protection as well as expensive weapon systems; Japan, Taiwan and the Korean peninsula are under the US defence umbrella. Even for every iPhone sold, the bulk of the revenue goes to Apple, and not the assembler, Foxconn. For the rest of the world too, the US is the supplier of everything from Coke to Apple devices.

In any case, they cannot force war on the US, because again, it is militarily the most powerful nation. So, they’re forced to keep holding those dollars till the nigh end comes.

The Euro is another example of a currency worthy of being a reserve currency.

Now the currency of, say, Sri Lanka can’t be the world’s reserve currency because it simply cannot service the promise of paying back the goods-n-services equivalent of trillions of Sri Lankan rupees. It cannot even raise the amount even after selling all the land on its territory.

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