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

All currencies are NOT tied to the US dollar. There are a few that are, and a few that are intentionally controlled to try to stay at a constant ratio with the USD, but most currencies freely fluctuate relative to all others, including USD.

Many global transactions happen in USD because it’s a good “neutral currency” that’s really easy to exchange all over the world and pretty stable. It’s an easy one to use. If you’re doing a deal between, say, Nigeria and New Zealand, it’s not that likely that New Zealand is holding a ton of Nigerian Naira or Nigeria is holding a ton of New Zealand Dollars. Either one could buy some of the other’s currency to do the deal but those aren’t super liquid currencies and they’re not going to be super likely to use those currencies for other transactions. But if they do it in USD then it’s likely that both already have some USD holdings, it’s easy to get more if they need it, and it’s easy to use it or convert it some other currency later.

There’s nothing magic about USD, this works for any currency that’s common, large, and stable. Depending on the transaction, Euros, Yen, or RMB might fit the bill just as well.