International use of the U.S. dollar
The United States dollar was established as the world's foremost reserve currency by the Bretton Woods Agreement of 1944. It claimed this status from sterling after the devastation of two world wars and the massive spending of the United Kingdom's gold reserves. Despite all links to gold being severed in 1971, the dollar continues to be the world's foremost reserve currency. Furthermore, the Bretton Woods Agreement also set up the global post-war monetary system by setting up rules, institutions and procedures for conducting international trade and accessing the global capital markets using the US dollar.
The US dollar is widely held by central banks, foreign companies and private individuals worldwide, in the form of eurodollar foreign deposit accounts (not to be confused with the euro), as well as in the form of US$100 notes, an estimated 75% of which are held overseas.[1] The US dollar is predominantly the standard currency unit in which goods are quoted and traded, and with which payments are settled in, in the global commodity markets.[2]
The US dollar is also the official currency in several countries and the de facto currency in many others, with Federal Reserve Notes (and, in a few cases, US coins) used in circulation.
The monetary policy of the United States is conducted by the Federal Reserve System, which acts as the nation's central bank.
Ascendancy[edit]
The primary currency used for trade around the world, between Europe, Asia and the Americas had historically been the Spanish-American silver dollar, which created a global silver standard system from the 16th to 19th centuries, due to abundant silver supplies in Spanish America.[3]
The US dollar itself was derived from this coin. The Spanish dollar was later displaced by sterling in the advent of the international gold standard in the last quarter of the 19th century.
The US dollar began to displace sterling as international reserve currency from the 1920s since it emerged from the First World War relatively unscathed and since the United States was a significant recipient of wartime gold inflows.
[4]
After the US emerged as an even stronger global superpower during the Second World War, the Bretton Woods Agreement of 1944 established the post-war international monetary system, with the US dollar ascending to become the world's primary reserve currency for international trade, and the only post-war currency linked to gold at $35 per troy ounce.[5]
Despite all links to gold being severed in 1971, the dollar continues to play this role to this day.
In the global markets[edit]
The US dollar is predominantly the standard currency unit in which goods are quoted and traded, and with which payments are settled in, in the global commodity markets.[2] See petrocurrency, petrodollar.
The United States Government is capable of borrowing trillions of dollars from the global capital markets in US dollars issued by the Federal Reserve, which is itself under US government purview, at minimal interest rates and with virtually zero default risk. In contrast, foreign governments and corporations incapable of raising money in their own local currencies are forced to issue debt denominated in US dollars, along with its consequent higher interest rates and risks of default.[16]
The United States's ability to borrow in its own currency without facing significant balance of payments crisis has been frequently described as its exorbitant privilege.[17]
Chinese-issued U.S. dollar bonds[edit]
The issuance of U.S dollar-denominated bond issued by Chinese institutions doubled to $214 billion in 2017 as tighter domestic regulations and market conditions saw Chinese companies look offshore to conduct their fund-raising initiatives. This has far outpaced many of the other major foreign currency bonds issued in Asia in the last few years.
The anticipated continuation of a prudent monetary policy in China to curb financial risks and asset bubbles, along with the expectation of a stronger yuan will likely see Chinese companies to continue to issue U.S. dollar bonds.[35]
Major issuers of U.S. dollar denominated bonds have included Tencent Holdings Limited, Industrial and Commercial Bank of China Limited and Sinopec Group. In 2017, China's Ministry of Finance revealed plans to sell US$2 billion worth of U.S. dollar sovereign bonds in Hong Kong, its first dollar bond offering since October 2004.[36] The technology and communications sector in China is a taking significant share of the offshore U.S. dollar bond market. Tencent priced $5 billion of notes in January 2018 as a string of Asian technology firms continued to issue debt as market values swelled.[37]
U.S dollar-denominated bond issued by Chinese institutions has also been referred to as "Kungfu bonds",[38] a name born out of a consultation with more than 400 market participants across Asia by Bloomberg L.P.[39][40]