Why is the U.S. Dollar the World’s Reserve Currency?

By James Brumley

Thought there are 178 currencies across the globe to choose from, the world has chosen the U.S. dollar as the primary vehicle to facilitate international trading of goods and services… including gold, and especially oil. As such, U.S. dollars are also the most widely held currency among nations and major institutions.

What is a Reserve Currency? In simplest terms, a reserve currency is a currency held in large quantities by a government or another major financial entity for the purpose of making international trade easier, or to protect it from a drastic swing in the value of its native currency, or both.

It’s not an official designation, but rather one that stems from the fact that of all currencies held by other entities, the U.S. dollar is the most common and prolific. Estimates suggest 2/3 of all currency held in reserve is made up of U.S. dollars. The next-nearest currency is the Euro, but it only makes up about ¼ of the currency held by those entities with reserve holdings.

Sometimes a reserve currency is referred to as an ‘anchor’ currency, though that term has no official meaning either. Rather, it’s designation that has materialized just by history and preference.

Why is the U.S. Dollar the World’s Reserve Currency? Though there is some debate about how and why the U.S. dollar is used to price gold and oil, as well as serve as the medium for most international trade, the ultimate reason is undisputed…. size and strength.

The United States has traditionally been the world’s largest international trader, which has allowed the country to set the terms and conditions for most foreign trade. Similarly, the U.S. economy – though far from perfect - is also viewed as one the world’s most stable, making its currency’s value at least somewhat reliable.

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