The US dollar came to be the world’s reserve currency after a convention. The meeting was held in 1944 under the Bretton Woods Agreement, approved by 44 nations.
Most currencies can replace the dollar and become the reserve currency. But, due to its domination, the world cannot easily replace it. Indian rupees are also less dominant than US dollars.
In this article, we will read about international reserve currency. Why does the US dollar overpowers the rupee?
What Do You Signify by Reserve Currency?
A reserve currency can be any sort of currency that governments and institutions keep in large quantities. Government organisations keep these currencies to underpin the value of national currencies, and they can also use them as a means of international payment.
A reserve currency is a considerable quantity of a foreign currency or some precious metal that a bank or organisation, country’s government, central bank, or other monetary authority keeps and maintains.
Countries use these currencies for participation in the global economy through overseas transactions and investments.
In simple words, you can say that reserve currency is one that:
- That has the depth and liquidity to conduct international transactions securely and efficiently.
- With the support of these currencies, you can convert them and utilise them openly and effortlessly.
- Many monetary authorities and institutions have large amounts of it.
The US dollar became the international reserve currency in the mid-twentieth century. Since then, the robust economies in many countries have fueled the emergence of other international reserve currencies. Several factors determine a currency’s usefulness as a reserve currency.
Factors that influence its usefulness are:
- Does the country’s currency have the best economic rate to become the reserve currency?
- How significant is that economy on a global scale?
- How open are the country’s financial markets?
- What is the convertibility of the currency? Can people easily use it for transactions in other countries?
- Depending on the situation, can people use the said currency as a regional or international currency?
How Did the Dollar Become the World’s Reserve Currency?
One of the world’s most powerful currencies is the United States dollar (USD). It is the official currency of various countries, including the United States. The first dollar was known to be printed and circulated in 1914, despite its long history in the United States.
Due to the Bretton Woods Agreement, the United States dollar became known as the world’s reserve currency. The world’s greatest gold reserves backed this currency. Several countries accumulated dollars instead of gold, making it more dominant and powerful.
And several nations also began purchasing US Treasury contracts. The reason many countries invested in dollars instead of gold was the belief that it is a safer repository of money, as they needed a place to store their dollars.
Why is the Dollar More Dominant Over Other Currencies?
The legal tender between the Indian subcontinent and the United States is the Indian National Rupee and the US Dollar, respectively. But both these currencies are money in both these countries. The USD and the INR are accepted as money in the United States and India, respectively. These currencies are acceptable because of several factors, including:
1.General Acceptability
General acceptability implies that no one should reject approving that currency.
2.Unit of Account
The unit of an account implies that one can utilise it to affect the real price of a monetary commodity.
3.Store of Value
Store of the value indicates that its price must not succumb if it is stocked.
4.Medium of Exchange
Medium of exchange indicates that people can use it to trade goods and services.
Rupees and dollars meet the above standards, and hence, they became the currencies of India and the United States, respectively. However, when different countries exchange goods and services via themselves in international trade, the rupee lacks general acceptability.
Whereas almost all nations approve of the use of the dollar, jewel, International Monetary Fund (IMF) Special Drawing Rights (SRD), and other heavy currencies (the Japanese Yen, Euro, etc.) as a tool of exchange. Therefore, dollars have become the reserved currency and are used as an international currency. In contrast, the rupee remains an Indian-only currency.
Why is the Dollar More Powerful than the Indian Rupee?
The US dollar overpowers the rupee for a simple reason. Most of India’s foreign trade and debt is denominated in US dollars. As a result, every increase in the dollar index automatically transmits in an equal proportion to the INR/USD exchange rate.
The dollar index rate is a critical factor in determining the rupee’s value all these years in the US economy vis a vis the Indian economy.
Conclusion
In this article, we learnt about international reserve currency, i.e. dollars. And we got to understand the US economy vis a vis the Indian economy.
Lastly, do you know why the dollar overpowers the rupee?
Currently, the US is the world’s most powerful reserve currency, amounting to 61% of foreign reserves.
