By the end of the 20th century, the United States dollar was considered the world’s most dominant reserve currency. International currencies in the past have included the Greek drachma, coined in the fifth century B. Under the gold standard, the predominant global financial system from 1870 to 1914, paper notes were convertible into preset, fixed quantities of gold. The Dutch guilder emerged foreign currency trading introduction to and explanation of a de facto world currency in the 18th century due to unprecedented domination of trade by the Dutch East India Company.
Harry Dexter White helped to draft the provisions of the post-war financial system. Here, they meet at the inaugural meeting of the International Monetary Fund, 1946. Attempts were made in the interwar period to restore the gold standard. The British Gold Standard Act reintroduced the gold bullion standard in 1925, followed by many other countries. After World War II, the international financial system was governed by a formal agreement, the Bretton Woods System. In the late 1960s and early 1970s, the system suffered setbacks ostensibly due to problems pointed out by the Triffin dilemma—the conflict of economic interests that arises between short-term domestic objectives and long-term international objectives when a national currency also serves as a world reserve currency. The reserves of the individual reporting countries and institutions are confidential.
The percental composition of currencies of official foreign exchange reserves from 1995 to 2017. Economists debate whether a single reserve currency will always dominate the global economy. However, some economists, such as Barry Eichengreen, argue that this is not as true when it comes to the denomination of official reserves because the network externalities are not strong. As long as the currency’s market is sufficiently liquid, the benefits of reserve diversification are strong, as it insures against large capital losses. The top reserve currency is generally selected by the banking community for the strength and stability of the economy in which it is used.
Thus, as a currency becomes less stable, or its economy becomes less dominant, bankers may over time abandon it for a currency issued by a larger or more stable economy. This can take a relatively long time, as recognition is important in determining a reserve currency. The G8 also frequently issues public statements as to exchange rates. In the past due to the Plaza Accord, its predecessor bodies could directly manipulate rates to reverse large trade deficits.
The United States dollar is the most widely held currency in the Allocated Reserves today. Throughout the last decade, an average of two thirds of the total Allocated foreign exchange reserves of countries have been in US dollars. However, the dollar remains the favorite reserve currency because it has stability along with assets such as United States Treasury security that have both scale and liquidity. The US dollar’s dominant position in global reserves is challenged occasionally, because of the growing share of unallocated reserves, and because of the doubt regarding dollar stability in the long term. The dollar’s role as the undisputed reserve currency of the world allows the United States to impose unilateral sanctions against actions performed between other countries, for example the American fine against BNP Paribas for violations of U. France or the other countries involved in the transactions. The euro is currently the second most commonly held reserve currency, comprising about a quarter of allocated holdings.