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USD is the most popular global monetary unit of the largest economy in the world that was first circulated in 1794 after the Coinage Act was introduced that determined the legislative basis for minting capital in the country.
It was introduced by the Federal Reserve – the privately owned central bank, that took over the US banking system in 1913.
In colonial times, pounds, shillings, and Spanish silver dollars were used as the means of exchange. Some colonies tried to issue fiat paper currency to pay debts or to fund wars, and after the American Revolution, the continental exchange was introduced.
The act of attaching the value of USD to the Spanish silver dollar was introduced, and in 1830, the banking rules were made to issue such units of exchange.
The first official paper money was introduced in 1861 to fund the Civil war.
Mainly, its role is to serve as a medium of exchange and a unit of account. Among 151 currencies in the world, the dollar holds a preeminent position.
Today, a large share of assets and liabilities, globally, are denominated in it. Some countries hook their money to another country’s legal tenders and USD represents 25 to 30 percent of the total number of countries that peg their exchange value to it.
It is widely used worldwide as a reserve by the non-US savers as a medium for invoicing by the traders.
Non-US borrowers get funding in dollars.
It accounts for almost double the share of the second most used currency Euro and is widely used in the international trade and finance sector.
It is the key choice for cross border bank lending and international debt issuance, mostly, for the merging market firms it is widely used as an invoicing medium for trade transactions between the non-US nations.
It is globally accepted as the reserve currency, which means, it is widely used as a store of wealth and accounting for more than 50 percent of the foreign exchange reserves of the central banks and over 50% of the external assets of the non-US countries.
The cause for appreciation in the value of USD is - tightened US monetary policy and change in the investors’ sentiments due to lower GDP and growth as compared to the rest of the world.
This makes it a fundamental component in the relationship between the stock market and the economy.
If the dollar appreciates against another country – the products of that country become competitive relative to US products increasing exports and output.
But if the exports are invoiced, in terms of, dollars, the gains are not effective and may not materialize.
Countries that borrow in dollars need to repay the debt in the dollar and if the rate of domestic money against dollar increases, one will have to pay more.
This effects the global investment banking process and financial services.
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