The United States Dollar (USD) is nearly always used as the benchmark when media outlets, financial analysts, and economists compare the value of different currencies. But why the USD? Why not the British Pound, Euro, or even gold? The answer is a combination of historical events, economic influence, political stability, and international trust, rather than the face value or “strength” of the currency itself.
The Bretton Woods Agreement: The Foundation of Dollar Dominance
The Bretton Woods Agreement of 1944, in which 44 Allied countries established a fixed international exchange rate system with the USD pegged to gold and all other currencies pegged to the USD, is where the US dollar’s dominance began. Since the US had a sizable portion of the world’s gold reserves at the time, it was the most reliable economy to support international trade. Others were then obliged to follow the newly established International Monetary Fund (IMF), which supervised currency values and permitted rate adjustments for struggling countries.
Up until the late 1960s, when pressure on US gold reserves rendered the gold-backed dollar unsustainable, this system persisted. President Nixon essentially abolished the gold standard in 1971 when he suspended gold convertibility. By 1973, when Bretton Woods collapsed, the majority of major currencies had switched to a floating exchange rate system. Despite this, the USD’s early status as the world’s anchor currency allowed it to maintain its pivotal role in international finance.
The US Dollar as the Global Reserve Currency
The International Monetary Fund (IMF) estimates that 58% of the world’s foreign exchange reserves are currently denominated in US dollars. Accordingly, the majority of central banks worldwide maintain USD in order to support foreign debt obligations, stabilize their own currencies, and promote international trade.
The Rise of the Petrodollar System
Since the 1970s, agreements between the United States and major oil-producing countries like Saudi Arabia have made nearly all international oil transactions in USD. This arrangement, sometimes referred to as the “petrodollar system,” forces nations that import oil to maintain substantial reserves of US dollars in order to cover their energy expenses. This eventually spread to include metals, wheat, and gold, among other commodities.
Trust, Liquidity, and Economic Size
According to the World Bank, the US economy is still the biggest in the world, with a GDP of over $27 trillion in 2024. The capital markets in the nation are deep and liquid. Extremely open regulatory frameworks and a track record of keeping promises and debts In times of global financial instability, the US Treasury market, which issues bonds in USD, is also regarded as a “safe haven.”
Network Effect: Why the World Still Chooses the USD
The network effect is the idea that an item becomes more valuable to everyone else the more people use it. The USD is already used by the majority of international organizations, banks, businesses, and governments, so there is inertia; it is simpler and safer to stick with the dollar than to abandon it.
Is the US Dollar the Most Valuable Currency?
Surprisingly, no. A number of currencies are worth more than the dollar per unit:
- Kuwaiti Dinar (KWD) = $3.25
- Bahraini Dinar (BHD) = $2.65
- Omani Rial (OMR) – $2.60
However, the governments of these small, resource-rich nations set their currencies at high values. They are not frequently used as reserve currencies or in international trade.
Why the USD Still Leads the Global Economy
The US dollar is still the world’s monetary standard due to its historical significance, global usefulness, and credibility rather than its face value. Because of its deep integration into the global financial system, from oil contracts to central bank reserves, the USD serves as the de facto benchmark for evaluating the worth of other currencies.
