Eli5: Why is the U.S. Dollar so powerful?
In: 208
The US protects global shipping lanes and heavily influences global oil supply. It’s also one of the most stable, readily accessible global currencies. For both reasons, countries buy and sell goods in dollars. When countries buy and sell in a specific currency, they also end up buying lots of bonds in that currency. This gives the government and central bank of this currency lots of power.
An overly simplified example: Canada is buying oil from Saudia Arabia in a year. Saudia Arabia is only going to sell that oil in dollars — the US made deals with them to do so. Canada needs to have a bunch of dollars in a year, so they buy US bonds now. If you were saving for a big purchase in a month, you’d put your money in a savings account too, right? Those bonds give the US government a loan, which increases the federal governments annual budget. It also creates a huge market for US financial services to support all that movement of money. The Federal Reserve also now has a bunch of Canadian wealth floating around in dollars, affected by Federal Reserve monetary policy.
The oil bit of this is called the [petrodollar system](https://www.lynalden.com/fraying-petrodollar-system/). The fact that everyone, everywhere uses dollars is called [global reserve currency status](https://www.investopedia.com/articles/forex-currencies/092316/how-us-dollar-became-worlds-reserve-currency.asp). These two concepts together are what make the dollar so powerful.
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