It is the size, stability, and liquidity of a country’s financial markets that are the major underlying factors to determine the strength of a reserve currency and, as such, the U.S. dollar is the world’s most dominant reserve currency, making up about 64% of all official foreign exchange reserves. The USD is so dominant, in fact, that more and more countries around the world are pegging their currencies to the dollar as illustrated in this video.
The U.S. dollar is followed by the euro…at 20%. The British pound amounts to 5%, the Japanese yen 4%, and both the Canadian dollar and the Australian dollar at 2% each. The Swiss franc and other currencies make up the remaining 3%. The Chinese yuan recently won IMF approval to make up part of its Special Drawing Rights (SDR) basket..but is not a significant player yet, but in the future it may be.
While China is now the largest economy in the world in terms of purchasing power, the financial markets of the United States still reign supreme. For example, U.S. stock markets still make up 52% of the total market capitalization of global equity markets. China’s markets are puny in comparison at around 2%…There are signs of a shift in momentum, however, [and it begs the question as to how long] this dollar hegemony will continue into the future?
At first, it was U.S. overseas territories such as Guam and the U.S. Virgin Islands that would adopt the dollar. Later in the 20th century -and into the 21st – major nations from China to Argentina began to peg their currencies to the dollar for much-needed stability.
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[The original post and video come from HowMuch.net with additional copy from an adaptation by visualcapital.com. Both are presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – sign up in top right corner) in an edited ([ ]) and abridged (…) format to provide a fast and easy read.]