Eli5: Why is the U.S. Dollar so powerful?
In: 208
The same thing that makes any currency powerful: Demand for the products you can buy with it. A better question to ask is, “Why aren’t other currencies as strong?”.
The simple answer is size and *safety*. There are only so many economies on a scale of the American economy, so the possible contenders for a substitute for the U.S. dollar as the de-facto reserve currency of the planet would be the Euro and the Yuan. Both of those currencies have some fundamental problems which keep them from being more enthusiastically adopted.
In the case of the Euro, the problem is the currency is not backed by a unitary state, and in a larger geopolitical problems plaguing the EU, like Brexit, the various economies in crisis which are part of the trading bloc, do not support investor confidence.
In the case of the Yuan, there’s a unitary state, and certainly nobody thinks China is going to up and vanish, or break up, but investors are even more distrustful of the PRC leadership than they are of the fragmented confederation of the E.U.
And once you exclude those two countries, there’s really not much in the way of options. Japan? India? The United States is the country that’s big enough, rich enough, and least likely to default on the obligations of their treasury, or co-opt the wealth of the people positioned on the dollar.
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