World currency

United States dollar & the Euro

Since the mid-20th century, the de facto world currency has been the United States dollar. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principle reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves" (255).

Many of the world's currencies are pegged against the dollar. Until July 2005, the Chinese renminbi was one such currency. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and eliminated their own currency in favor of the United States dollar.

But its dominance has begun to be undermined very recently (1999) by the euro, that represents an equivalent size economy, with the prospect of more countries adopting the euro as their national currency. Quite a few of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Estonian kroon and the Bulgarian lev, plus some north African currencies like the Cape Verdean escudo and the CFA franc.

In July 2005, the euro together with the American dollar, the South Korean Won and the Japanese yen are the main currencies in the basket of the Renminbi.

History

In the 17th and 18th century, the use of silver Spanish dollars or "pieces of eight" spread from the mines in the Americas eastwards to Asia and westwards to Europe forming an early worldwide currency.

Prior to and during most of the 1800s international trade was denominated in terms of currencies that represented weights of gold. Most national currencies at the time were in essence merely different ways of measuring gold weights (much as the yard and the metre both measure length and are related by a constant conversion factor). Hence some assert that gold was the world's first global currency. The emerging collapse of the international gold standard around the time of World War I had significant implications for global trade.

In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged against the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar a global currency.

Since the collapse of the fixed exchange rate regime and the gold standard and the institution of floating exchange rates following the Smithsonian Agreement in 1971, currencies around the world have no longer been pegged against the United States dollar. However, as the United States remained the world's preeminent economic superpower, most international transactions continued to be conducted with the United States dollar, it has remained the de facto world currency.

Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, for a while, the Japanese yen became increasingly used as an international currency, but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has competed with the United States dollar in usage in international finance, however as of 2006, the United States dollar remains by far the most widely-used currency.

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