Why is the U.S Dollar so much stronger than a majority of other currency around the world?

Question

I have always wonder why its so much stronger ? when you go to Japan, everything is cheaper in a sense and the U.S dollar means more in Japan. Why is that ?

In: Economics

Answer 1

Countries like to hold other country’s currency as reserves. When people say the USD is the world’s reserve currency, they don’t mean that it’s the only currency other nations hold in reserve, they mean it’s the most popular one.

*USD = 58.4%
*Euro = 20%

There are other currencies held by nations in reserve as well, such as Renminbo, Pound Sterling, Yen, Swiss Francs, Canadian Dollar, and Austrlian Dollar (these all add up to about 18%)

And the remaining >4% is every other currency.

Think of it in two ways. First, let’s say you personally wanted to hold some foreign currency as an investment/savings in case something goes wrong with your countries, or in case you travel abroad. You’d probably pick from USD, Yen, Euro, and not something like the Niagerian Niara.

2nd, think of it like a language. If an Italian and Japanese person meet in an airport, what’re the odds they both know each other’s language? How about an Indian and a Russian? Chinese and Mexican? How many possible combinations of Language A to Language B translations exist? Instead, the most likely possibility is all of these people may know English as a 2nd language and speak in that.

Take a country like India: they’re trading abroad say, with Mexico, Saudi Arabia, South America, Japan, Egypt, etc. Which currency should they used for these transactions? Should India hold Mexican Pesos in reserve to buy Mexican goods? And then what do they do with the left over Pesos? Then they sell some goods to Egypt and receive Egyptian Pounds in exchange? Now what?

If each country traded in their own currency, it would make things a lot more complicated given all of the possible combinations of currency conversions out there. It’s much easier to just default to the USD (same as speaking English abroad) as the USD is plentiful outside of US borders, has very little restrictions placed on it, and is backed by the US government. Most other countries would likely be happy receiving it, and now trade is much easier.

It also helps that it’s the currency of the richest nation on earth and simplifies trading there as well