World currency

Definition

In general terms, a world currency refers to the currency widely accepted by the majority in international trade. The world currency is thus vastly used in majority of international transactions and also serves as the reserve currency in the World. As a consequence, the actions of the nation with the currency serving as the World currency usually have a ripple effect to the World market and other nations with extensive use this currency. There before the particular nation makes any changes it has to consult other major Word players. In the past, the US dollar has served as the World currency but the Euro is slowly catching up.

The Gold Standard

In the advent of modern international trade coins pegged on their weight of gold in their make up in what was known as the Gold standard were used in trade. Gold was the reserve item for all member states. Each country’s currency had its value per ounce of gold and for there to be an exchange in currency; one currency had first to be converted to gold then backs the other currency. There were no institutions or laws to oversee the implementation of the exchange rates. The member countries’ nation governments however, pledged to buy and sell gold at the fixed prices. This system however did not last long as a shortage of gold and the starting of World War 1 put to a hold any trading activities during the period. After the war, a few nations tried to revive the Gold Standard to no avail. These events build up to the 1944 Bretton woods talks.

The US dollar

The US dollar was installed as the World reserve currency during the 1944 Bretton Woods talks. This followed the failure of the Gold standard system due mostly to shortage of gold supplies. The member countries to select a variable that could be controlled and the U.S.A was the World Superpower, its currency was selected to act as the world currency. All other international currencies had to pegged against the US dollar. The exchange rates of other currencies were fixed against the US dollar with a bound of 1% i.e. the exchange rate could be adjusted upwards or downwards about the fixed rate to a degree of 15. Any greater change had to be approved unanimously by all member countries.  The US dollar was used to this status until 1971 without any challenge to the title. The US dollar has only be challenged by two currencies ever since; the Japanese yen which was used in the 1980s and most recently by the Euro.

The Euro

Since the late 1990s, the dominance of the US dollar has been majorly eroded by the euro. This is mainly due to the fact that it is representative of the greater European countries with all but one member (Britain) countries of the European Union adopting it as the national currency. Other countries outside the euro-zone seeking to trade in the region have also adopted the Euro as the reserve currency of choice.