Every minute of every day, people around the world are selling, buying, lending and borrowing, using 180 different currencies. But one of those currencies is used far more than any other: the U.S. dollar.
“Folks around the world see the dollar as one of the safer assets during periods of turmoil,” said Tate Lacey, who covers monetary policy at the Cato Institute, a Washington research group.
The dollar is the primary international currency because it’s stable, the U.S. economy is consistently dynamic, and the dollar has had relatively low inflation over time.
That stability is why foreign governments, companies and people buy U.S. Treasury securities: They offer the safest investment destination for less-stable currencies.
In recent months, investors worldwide have bought more Treasury notes and bonds than at any other period in the last two years, according to Treasury Department data.
Another way to understand the confidence the world has in the dollar is to consider reserve currency. Reserve currency is a large quantity of currency that a country’s central bank and major financial institutions hold to be used later for investments and international debt obligations. Countries may hold a number of currencies as part of their reserve currency, including euros, pounds and yuan, among others.
But most depend on the dollar. The International Monetary Fund’s most recent report on the currency composition of foreign exchange reserves showed the dollar’s strength as a reserve currency: The dollar makes up 62.7 percent of the world’s currency reserves, IMF found.
In fact, while the dollar’s share varies, it has never made up less than 50 percent of foreign exchange reserves.
International investors, said Lacey, look for stable ways to save money, especially in times of economic crisis, “and dollars provide that in a way that very few — if any — other currencies do.”
The strength of the dollar, said Secretary of the Treasury Steven Mnuchin, “is a reflection of the U.S. economy and the fact it is and will continue to be the primary currency in terms of the reserve currency.”