The Dollar as World Currency
How the US dollar achieved global dominance, why it persists despite challenges, and what would happen if it fell.
The Pillars of Dollar Dominance
The US dollar accounts for roughly 58% of global foreign exchange reserves, 88% of foreign exchange transactions, and the majority of international trade invoicing. Oil, the world's most traded commodity, is overwhelmingly priced in dollars. Most international debt is denominated in dollars. This dominance gives the United States what French Finance Minister Valery Giscard d'Estaing called an 'exorbitant privilege' -- the ability to borrow cheaply, run persistent trade deficits, and project financial power globally.
Dollar dominance rests on several reinforcing pillars: the depth and liquidity of US financial markets (the US Treasury market is the world's most liquid), the rule of law protecting property rights, the Federal Reserve's credibility as a monetary authority, America's military and geopolitical reach, and simple inertia -- the dollar is used because everyone else uses it, creating a self-reinforcing network effect.
