Why do we use the US dollar?

The US dollar is the most widely used currency in the world. It is the standard currency for international trade, the most commonly held reserve currency by governments, and the currency most people turn to when their local money loses value.

How did the dollar become so dominant?

After World War II, the world's major economies agreed to a system where their currencies were tied to the US dollar, and the dollar was tied to gold. This made the dollar the center of global finance. Even after the US dropped the gold standard in 1971, the dollar kept its position because of the size of the US economy, the stability of its institutions, and the fact that so much of the world's trade was already conducted in dollars.

Today, the dollar is used to price oil, settle international trade, and serve as the foundation of the global financial system. When people or governments around the world want a safe place to store value, the dollar is usually the first choice.

Why do people outside the US hold dollars?

When a local currency is losing value quickly, holding onto it means watching your savings shrink. People naturally look for an alternative that holds its value better. The US dollar is the most common choice because it is widely accepted, relatively stable, and used in international trade around the world.

In many countries, this happens informally and from the ground up. Shop owners start pricing goods in dollars. Landlords ask for rent in dollars. People keep their savings in dollar bills at home. Over time, the local currency becomes something people try to get rid of as quickly as possible, and the dollar becomes the money people actually trust. This process is called dollarization.

What is a currency peg?

Some countries try to maintain trust in their local currency by pegging it to the dollar. A currency peg means the government sets a fixed exchange rate between the local currency and the dollar. For example, a government might say that one dollar always equals 1,500 units of the local currency.

The idea is to create stability. If people know the exchange rate will not change, they feel more confident holding the local currency. But maintaining a peg requires the government to hold large reserves of dollars. If those reserves run low, or if the economy comes under pressure, the peg can break. When it does, the local currency can lose value very quickly, sometimes overnight.

Lebanon maintained a peg of 1,507 lira to the dollar for over two decades. When the peg collapsed in 2019, the lira lost over 98% of its value within a few years. Argentina has gone through multiple peg cycles, each time trying to stabilize the peso against the dollar, and each time eventually seeing the peg break under economic pressure.

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