On July 6, 1785, the U.S. dollar was adopted as the official currency of the United States. Since then, it has established itself as the most widely used reserve currency worldwide.
The origin of the dollar comes from the term “Thaler,” which was used to refer to silver coins produced in Joachimsthal, a German-style name for a region in the southeast of the modern-day Czech Republic. Today, besides the United States, countries like Canada, Australia, New Zealand, Singapore, Taiwan, and Hong Kong also use currency denominated in dollars. However, when people refer to the dollar, they typically mean the U.S. dollar.
The prestige and credit of the U.S. dollar have skyrocketed, with the U.S. market emerging stronger from Europe’s two great wars. Prior to the end of World War II, the United States had amassed over half of the world’s gold reserves. In 1944, the Bretton Woods system was implemented during a meeting with 44 Western countries to establish the post-war global economic order, making the U.S. dollar the reserve currency backed by gold.
The dollar has many strengths. The U.S. economy is the largest in the world, with the country enjoying high political stability. Thanks to the development of its financial markets and flexible financial policies, the dollar is an attractive asset for investors to use as a medium of exchange.
However, there are threats to the dollar’s status. Changes in the international trade environment due to China’s economic growth, the emergence of the European Union (EU), and the rise of emerging markets could potentially diminish the relative importance of the dollar. America’s chronic fiscal deficit, debt issues, and indiscriminate money printing could all serve as factors that diminish the value of the dollar.
Lately, the U.S. dollar has been experiencing increased volatility. The aggressive interest rate policy by the Federal Reserve (Fed) has led to the appreciation of the U.S. dollar against all currencies. However, there are also possibilities of depreciation due to fears of a U.S. economic downturn, potential global economic slowdown, and geopolitical instability. Nonetheless, the U.S. dollar is expected to maintain its dominance for the foreseeable future.