The dominant US Dollar (USD) appears on one side of 88% of all currency transactions, meaning that the asset remains incredibly influential in the forex market.
From an economic perspective, the USD is also the most widely held currency in allocated reserves, representing approximately 61% of all international currency reserves in the process.
But what are the key factors that make the USD the world’s strongest currency, and why has the asset continued to rise against the backdrop of an increasingly worsening economic climate?
What Makes the USD the World’s Most Dominant Currency?
Because the USD is the world’s dominant reserve currency, the country can run far higher trade deficits with postponed economic impact.
This also helps to protect and shield the USD from a potential currency crisis, even during periods of increased inflation (which shares an inverse relationship with interest rates and currency values) and financial hardship.
From a more general perspective, it’s the relative strength of the US economy when compared to others that support the enduring strength of the dollar.
Currently, the US boasts the largest economy in the world, with a total GDP of $22.3 trillion as of 2022. This supports the dollar and affords it a competitive edge over its rivals, with some $2.04 trillion worth of the USD in circulation globally.
Many of these bills are spread far and wide too, in neighbouring Latin American countries and even jurisdictions within the former Soviet Union.
The strength of the USD is also underpinned by the oil reserves available in North America, which takes into account the unique relationship that exists between the dollar and one of the most volatile commodities.
Why Has the USD Continued to Outperform Inflation?
The USD has certainly showcased all of its strength and robustness of late, outperforming the Euro (EUR) and making significant gains against the British pound (GBP).
The GBP/USD pairing fell to the key low of 2020 and long-term trend support reached back to 1985, as the greenback soared despite a myriad of global economic issues.
It also outperformed the forex market as a whole, highlighting its incredible resilience when compared to many of its major currency rivals.
What’s more impressive is how the USD is managing to outperform inflation, rising by 11.5% this year to date while inflation peaked at 8.3% in August. This is counter-intuitive from the perspective of basic economics, so why is it happening?
Well, when the dollar is strong relative to its rivals, the cost of importing goods from overseas decreases. This, in turn, helps to create a downward pressure on inflation, which helps to explain both the current circumstances in the US and why the region is experiencing lower inflation than the UK and similar countries.
A strong dollar also encourages more Americans to travel abroad. Their dollar will subsequently go further too, helping to drive wider economic growth and boost performance over time.
Ultimately, however, it’s the fundamental strength of the US economy that continues to support the relative strength of the dollar, and this trend is unlikely to change anytime soon.