In the past 120 years, the popularity of different reserve currencies has fluctuated, reflecting the changing fortunes of the world's major economies.
For example, in 1900, the U.S. dollar and the British pound accounted for 0% and 62% of global foreign exchange reserves, respectively. But by 2020, the British pound currently only accounts for 4.7% of global foreign exchange reserves, while the U.S. dollar accounts for nearly 60% of global foreign exchange reserves.
The chart below shows the changes in reserve currencies over 120 years.
[1] What is a reserve currency?
Reserve currency is a large amount of currency held in the form of "reserves" by monetary authorities such as the central bank.
currency is usually used as a reserve to prepare for investment and trading. Our huge global trading system is worth close to 20 trillion U.S. dollars, which means that we need a large amount of currency as a reserve. In fact, it is estimated that there are 5 trillion USD of currency swap transactions every day.
The following are some of the reasons for holding foreign exchange reserves:
- Stable exchange rate is conducive to domestic currency circulation
- li43li43li43li43li _ 43li 43li bank investment portfolio diversified li43 This can reduce risk and improve credit rating
All conditions are the same,Countries have gained economic benefits from the increase in their national currency demand .
[3] The rise and fall of reserve currencies
Some economists believe that, in the long run, the demand for currency depends on the economic relevance of a country. Generally speaking, the larger the economic scale and strength of a country, the greater its network effect and the closer its connection with the global economy. Therefore, the greater their demand for currency as a reserve.
The foreign exchange reserve data of the past 120 years supports this statement to a certain extent. For example, the relative share of the Japanese economy in global GDP peaked in the early 1990s, before the impact of the "lost decade of ". Subsequently, their peaks as reserve currencies were roughly the same, reaching 9.4% in 1990.
[4] The era of the dollar's reign
Due to the economic strength of the United States after World War II , the US dollar is called the "instrument currency" by economists.
This means that many non-US dollar economies still choose to use US dollars for international transactions. These smaller and less accepted currencies are usually converted into U.S. dollars before any commercial or trade transactions are carried out. This is why, although Asian economies tend to treat China as their largest trading partner, they still use the U.S. dollar as the currency of choice for a large part of these transactions.
The following facts further prove the strength and strength of the US dollar:
- The currencies of more than 65 countries are pegged to the US dollar
- Some sovereign countries,For example, Ecuador and Panama use it as an official currency exchange.
- About 90% of foreign exchange transactions involve the U.S. dollar
In addition, in times of extreme uncertainty and turbulence, the U.S. dollar is often regarded as a safe haven. Given its status as the world's reserve currency, it can be regarded as less risky, and it can withstand a greater degree of economic shock than other currencies.
[5] A new challenger to the US dollar
In the not too distant past, the United States economically replaced the United Kingdom as the world's reserve currency. Today, based on GDP growth, the US economy is showing signs of slowing down.
China is on the rise and has replaced the United States as the EU's largest trading partner. It is expected that China will surpass the United States to become the world's largest economy in name by 2030. Will a new global reserve currency emerge?
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