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. Why is the U.S. dollar shown on the top of some currency pairs and on the bottom ...

    All currencies are traded in pairs. The first currency in the pair is called the base currency while the second is called ... Read Answer >>
  2. What is the gold standard?

    The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold, but ... Read Answer >>
  3. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
  4. Why isn't the EUR/USD currency pair quoted as USD/EUR?

    In a currency pair, the first currency in the pair is called the base currency and the second is called the quote currency. ... Read Answer >>
  5. What is foreign exchange?

    Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's ... Read Answer >>
Related Articles
  1. Trading

    How the U.S. Dollar Became the World's Reserve Currency

    The U.S. dollar was first minted in 1914. Find out what occurred during the last century to make the U.S. dollar the world's reserve currency.
  2. Investing

    Everything You Ever Wanted To Know About The Gold Standard

    Many feel that with the instability that occurred in the first decade of the 21st century, some form of the gold standard should be brought back.
  3. Investing

    Will the Yuan Become an International Reserve Currency?

    Although still a matter of when, China is likely to reach a significant milestone when the International Monetary Fund decides to include the Chinese yuan in its special drawing rights basket ...
  4. Trading

    The 6 Most-Traded Currencies And Why They're So Popular

    Regardless of the reason, forex is an integral part of 21st century finance. And the more widely used and reliable the currency, the greater the likelihood of people buying and selling it every ...
  5. Trading

    4 Of The Most Popular Traded Currencies

    Every day, trillions of dollars trade in the forex market. Here are a few of the most popular currencies, and some characteristics for each.
  6. Trading

    Why the Euro Failed to Become the World's Reserve Currency

    Examine the current state of the U.S. dollar as the world's reserve currency; learn the major reasons why the euro has failed to replace it in that capacity.
  7. Insights

    The Go-To Currency In 50 Years

    Discover why the euro will likely become heir to the currency throne.
  8. Trading

    Top 5 Hardest-Hit Currencies

    The value of a country's currency is dependent on many factors that will cause it to fluctuate, relative to other world currencies.
RELATED TERMS
  1. Currency

    Currency is a generally accepted form of money, including coins ...
  2. Reciprocal Currency

    In the foreign exchange market, a currency pair that involves ...
  3. Quote Currency

    The second currency quoted in a currency pair in forex. In a ...
  4. Currency Appreciation

    An increase in the value of one currency in terms of another. ...
  5. Funding Currency

    The currency being exchanged in a currency carry trade. A funding ...
  6. Gold Standard

    A monetary system in which a country's government allows its ...
Hot Definitions
  1. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  2. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  3. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  4. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  5. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  6. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
Trading Center