What does it mean when all currencies are tied to the US Dollar? And what happens to the rest of the world’s currencies when the Federal Reserve prints US Dollars?

Question

I thought the answer was simple. Printing will cause inflation, and the value of the dollar decreases with respect to all other currencies (barring currencies with fixed exchange rate to the USD).

I just found out that the US Dollar is ‘the world’s currency’ and that most transactions (even between two countries outside the US) happen in USD. I thought currencies just like any commodity will increase or decrease in value based on demand and supply. But it seems like there’s more to this answer specifically when it comes to the USD.

In: Economics

Answer 1

It’s funny because I had this conversation with my 13yo son not too long ago, he was asking why there was so many different currencies. Anyway, the currency, is a trade good of its own. Let’s say an XYZ country discovers a new natural resource, that the entire world will want. That country could decide to export it only in their national currency, not allowing any trade in US dollars. Then, buyers would have to purchase XYZ currency to purchase said resource, by doing so, this currency would be exchanged far more than it used to, hence increasing its value.
Getting back to the root question, the federal reserve is just another bank. When they are « printing » money, they are in fact only replacing destroyed bills and also only creating bills that were payed back by whomever they lended money in the first place. The money only exists when someone is paying their mortgage interests back. Until then, lended money is just the promise of a value that will be created by refunding it. A bit tricky to explain to a 5 year old though…