U.S. dollar and international trade

A question from Yahoo! Answers:

Why US $ is used for international trades?

why every country,companies use $ for any trades rather than there own currency or any other currency say Pound or Euro for major trades.

This is a remnant of the post-WWII situation. Right after WWII, virtually all European countries were in a very tight spot. They needed to trade with each other in order for their economies to function, but they had no trust in each other’s currencies (the post-WWI experience was that every country experienced major inflation and currency values were unpredictable, so everyone was afraid it was going to happen again). The newly-created IMF (International Monetary Fund) loaned each country a certain amount of U.S. dollars to serve as reserve currency. Since the U.S. economy did not sustain any major damage from the war, there was no need for the U.S. government to inflate, and the dollar was believed to be stable. In addition, the Bretton Woods agreement specified that the dollar was to be freely convertible into gold at $35 an ounce, while other countries were to maintain convertibility of their currencies into the dollar.

Also, right after WWII, the Soviet government moved its substantial dollar assets from New York to London and Paris. As a result, these two markets were flooded with dollars that needed to be lent (preferably short-term and with low risk). This is how the Eurodollar market got started…

Leave a Reply

Your email address will not be published. Required fields are marked *