Is there a world currency? If so, what is it?

By Selwyn Gishen AAA
A:

T

here is no such thing as a world currency. However, since World War II, the dominant or reserve currency of the world has been the U.S. dollar. At one time, all currencies were backed by gold, meaning that every country had to hold in reserve enough gold for all of the currency in circulation. In other words, gold was the standard by which all currencies were measured. After World War II, the United States became the world's largest and most dominant economy. Due to the global expansion that took place after the war, bank reserves did not hold enough gold reserves to back the growth of the currency, which was needed to finance the global expansion further. Consequently, the U.S. disconnected from the gold standard and began to print more paper money to finance the world's growth requirements. Because the U.S. was such a powerful economy, other countries agreed to accept the dollar as legitimate tender and followed suit to waiver the gold standard. Thus, the dollar became the most dominant currency and almost all commodities came to be quoted internationally in U.S. dollars.

As time went by and other economies developed, so did the value of their currencies. Today, the other two major currencies are the euro (the common currency of many European member states) and the Japanese yen. While the U.S. dollar remains the reserve currency of the world, it has depreciated in value in recent years and, consequently, the euro has increased in importance. In fact, the world can be divided into three main currency blocks, with the Americas dealing mostly in dollars, Europe dealing in euros, and the Asian countries becoming more connected to the yen. It is no coincidence that the three largest economies - the U.S., Europe and Japan - also represent the three most dominant currencies.

In the case of less dominant currencies, countries like Australia once had to do business with Japan by first doing business with the U.S. - converting its currency into U.S. dollars and then from U.S. dollars into Japanese yen. Today, there are many cross currencies, or instances when a currency pair is not associated with the U.S. dollar, allowing Australia to transact directly with Japan using AUD/JPY.

(For more on this topic, see Global Trade and the Currency Market and The Gold Standard Revisited.)

RELATED FAQS

  1. What are common strategies traders implement when identifying a Bearish Engulfing ...

    Learn how to spot a bearish engulfing pattern, and learn some of the trading strategies you can implement to take advantage ...
  2. What is the correlation between American stock prices and the value of the U.S. dollar?

    The correlation between any two variables (or sets of variables) summarizes a relationship, whether or not there is any real-world ...
  3. What do the terms weak dollar and strong dollar mean?

    The two terms, weak dollar and strong dollar, are generalizations used in the foreign exchange market to describe the relative ...
  4. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ...
RELATED TERMS
  1. Open Position Ratio

    The percentage of open positions held for major currency pairs ...
  2. Bear Straddle

    A speculative options trading strategy that consists of purchasing ...
  3. Bear Squeeze

    A change in market conditions that forces pessimistic investors ...
  4. Cross-Currency Settlement Risk

    A type of settlement risk in which a party involved in a foreign ...
  5. French Franc - F

    A currency used in France, prior to the introduction of the euro. ...
  6. Silver Standard

    A monetary system in which a country's government allows its ...

You May Also Like

Related Articles
  1. What factors would cause price changes in the controversial Iraqi dinar?
    Forex Fundamentals

    What Would Have To Happen For The Iraqi ...

  2. Iraqi Dinar 25000
    Forex Fundamentals

    Is the Iraqi Dinar Investment a Wise ...

  3. Is the Forex fix fixed?
    Forex News

    How The Forex "Fix" May Be Rigged

  4. The Yen's wild ride
    Forex Education

    From Mrs. Watanabe To Abenomics: The ...

  5. Position sizing will account for the quickest and most magnified returns that a trade can generate.
    Forex Education

    Position Sizing: The Way To Profit In ...

Trading Center