Advertisement Banner

How dominant is the US Dollar? Why is it needed for trade?

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
black envelope with cash dollars on marble table

How dominant is the US Dollar?

When country A needs to buy goods from country B, it has to pay country B in country B’s currency. If it uses country A currency, then it’s not usable in country B. However, it may be hard to determine the value of country A’s currency versus country B. Both would want their currency to be higher valued, then the country with a higher valued currency can buy more goods from the country with a lower valued currency.

So, in order to ensure a seamless trade, both countries can choose to use a common currency. In the world today, that common currency is typically US$. Briefly, currency helps to encourage economic activity so that countries could trade with one another easily. Barter trade is likely to be hard because the two countries may not be needing goods from one another or may not be at the same time too.

This is why US$ is do dominant today.

US Dollar
Source: visualcapitalist.com

When countries hold US$ as part of their currency reserves?

If I hold US$300 in my pocket right now, I would HATE it for the value of this US$300 to drop… right? Now you know why even more countries may prefer to hold their reserves in US$? It’s because so many countries are holding it, thus they fee it should be a safe currency to hold as a reserve, for trade and well if it appreciates because of high demand, it will benefit the country holding US$ too.

Next is Euro and a distance away is Yuan

Remember yeah, it’s EURO. It’s not British Pound. I still think Brexit is a wrong decision yeah. Let’s hope UK will somehow be able to increase their trade with all other nations beyond just the European ones.

Japanese Yen is being held by more central banks in the world and with China soon becoming the largest economy in the world in a few years’ time, more countries would be holding more of it too.

Swap agreement is helpful to reduce the need for US$

When China and Malaysia trade with one another, there’s really no need to use US$. We can use Chinese Yuan and Ringgit instead. A currency swap agreement is needed though. For example, Malaysia and China have a currency swap agreement for more than 10 years already. Hopefully this is renewed continuously. (earlier article here in BNM)

What happens with a currency swap is that both countries agree with a certain value assigned to both the currencies. This is a hedge against fluctuations and also takes away the need for a foreign currency to act as a trading currency. So yes, at the moment, US$ will remain extremely dominant and will be a trading currency of choice.

Please LIKE kopiandproperty.com FB page to get daily updates about the property market beyond kopiandproperty.com articles. Else, follow me on Twitter here.

Sign up for KopiWeekly. (only once per week of property, finance, investment news and more)

Next suggested article: Failed state? More like a failed statement

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

We love to hear from you (Facebook Comment)

LIKE us for property news update, FREE.


Advertisement Banner



kopiandproperty.com is everything about property related writings and news. Enjoy reading with a latte.

Advertisement Banner

LIKE us for property news update, FREE.

Property investment news everyday? Subscribe for free!

An article a day, keeps updated all the way.

Join 1,544 other subscribers

Property investment news everyday?

An article a day, keeps updated all the way. Subscribe for free!

join the family

Like us for daily investment news and more

Hit the like

%d bloggers like this: