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Encyclopedia > World currency
The euro and US dollar are by far the most used currencies in terms of global reserves.
 
The euro and US dollar are by far the most used currencies in terms of global reserves.

In the foreign exchange market and international finance, a world currency or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency. Image File history File links Download high-resolution version (2000x2000, 2324 KB)Newer version to replace Image:LineartPresRev. ... For other uses, see Euro (disambiguation). ... USD redirects here. ... The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade. ... Percentage of global currencies A reserve currency (or anchor currency) is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. ...


A world currency is at one extreme of a conceptual spectrum that has Local Currency at the other extreme. In economics, a local currency, in its common usage, is a currency not backed by a national government (and not legal tender), and intended to trade only in a small area. ...


Currencies have many forms depending on several properties: type of issuance, type of issuer and type of backing. The particular configuration of those properties leads to different Money#Types_of_money. The pros and cons of a currency are strongly influenced by the type proposed. Consider, for example, the properties of a Complementary Currency. For other uses, see Money (disambiguation). ...

Contents

The euro and the United States dollar

Worldwide use of the euro and the U.S. dollar:      United States      External adopters of the US dollar      Currencies pegged to the US dollar      Currencies pegged to the US dollar w/ narrow band      Eurozone      External adopters of the euro      Currencies pegged to the euro      Currencies pegged to the euro w/ narrow band
Worldwide use of the euro and the U.S. dollar:      United States      External adopters of the US dollar      Currencies pegged to the US dollar      Currencies pegged to the US dollar w/ narrow band      Eurozone      External adopters of the euro      Currencies pegged to the euro      Currencies pegged to the euro w/ narrow band

Since the mid-20th century, the de facto world currency has been the United States dollar. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principal reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves" (255). Image File history File links This is a lossless scalable vector image. ... Image File history File links This is a lossless scalable vector image. ... For other uses, see Euro (disambiguation). ... USD redirects here. ... The Eurozone (less frequently called the Euro Area or Euroland) refers to a currency union among the European Union member states that have adopted the euro as their sole official currency. ... De facto is a Latin expression that means in fact or in practice. It is commonly used as opposed to de jure (meaning by law) when referring to matters of law or governance or technique (such as standards), that are found in the common experience as created or developed without... USD redirects here. ... Robert Gilpin is a scholar of international political economy and the professor emeritus of Politics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University. ...


Many of the world's currencies are pegged against the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and eliminated their own currency in favor of the United States dollar. The dollar continues to dominate global currency reserves, with 64.6% held in dollars, as compared to 25.8% held in euros (see Reserve Currency). Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. ... Percentage of global currencies A reserve currency (or anchor currency) is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. ...


Since 1999, the dollar's dominance has begun to be undermined by the euro, that represents a larger size economy, with the prospect of more countries adopting the euro as their national currency. The euro inherited the status of a major reserve currency from the German Mark (DM), and since then its contribution to official reserves has risen continually as banks seek to diversify their reserves and trade in the eurozone continues to expand.[1] For other uses, see Euro (disambiguation). ... ISO 4217 Code DEM User(s) Germany, Montenegro, Kosovo ERM Since 13 March 1979 Fixed rate since 31 December 1998 Replaced by €, non cash 1 January 1999 Replaced by €, cash 1 January 2002 € = 1. ... The Eurozone (less frequently called the Euro Area or Euroland) refers to a currency union among the European Union member states that have adopted the euro as their sole official currency. ...


Similar to the dollar, quite a few of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Estonian kroon and the Bulgarian lev, plus several west African currencies like the Cape Verdean escudo and the CFA franc. Other European countries, while not being EU members, have adopted the euro due to currency unions with member states, or by unilaterally superseding their own currencies: Andorra, Kosovo, Monaco, Montenegro, San Marino, and the Vatican City. Eastern Europe is a concept that lacks one precise definition. ... ISO 4217 Code EEK User(s) Estonia Inflation 4. ... ISO 4217 Code BGN User(s) Bulgaria Inflation 7. ...  Western Africa (UN subregion)  Maghreb[1] West Africa or Western Africa is the westernmost region of the African continent. ... The Cape Verdean Escudo is the currency of Cape Verde. ... now. ... For other uses, see Kosovo (disambiguation). ... This article is about the country in Europe. ...


As of December 2006, the euro surpassed the dollar in the combined value of cash in circulation. The value of euro notes in circulation has risen to more than €610 billion, equivalent to US$800 billion at the exchange rates at the time.[2] This results in the Euro being the currency with the highest combined value of cash in circulation in the world. The 2006 Asian Games are officially opened by Qatari emir Sheikh Hamad bin Khalifa Al-Thani at the 50,000 seater Khalifa Sports Stadium in Doha, Qatar. ... One thousand million (1,000,000,000) is the natural number following 999,999,999 and preceding 1,000,000,001. ...


History

Spanish Dollar: 17th-19th centuries

In the 17th and 18th century, the use of silver Spanish dollars or "pieces of eight" spread from the Spanish territories in the Americas eastwards to Asia and westwards to Europe forming the first ever[citation needed] worldwide currency. Spain's political supremacy on the world stage, the importance of Spanish commercial routes across the Atlantic and the Pacific, as well as the coin's quality and purity of silver, made it become internationally accepted for over two centuries. It was legal tender in Spain's Pacific territories of Philippines, Micronesia, Guam and the Caroline Islands and later in China and other Southeast Asian countries until the mid 19th century. In the Americas it was legal tender in all of South and Central America (except Brazil) as well as in the U.S. and Canada until the mid-19th century. In Europe the Spanish dollar was legal tender in the Iberian Peninsula, in most of Italy including: Milan, the Kingdom of Naples, Sicily and Sardinia, as well as in the Franche-Comté (France), and in the Spanish Netherlands. It was also used in other European states including the Austrian Hapsburg territories. The Spanish dollar or peso (literally, weight) is a silver coin that was minted in the Spanish Empire after a Spanish currency reform in 1497. ... Sunset at Colonia on Yap The Caroline Islands form a large archipelago of widely scattered islands in the western Pacific Ocean, northeast of New Guinea. ... For other uses of terms redirecting here, see US (disambiguation), USA (disambiguation), and United States (disambiguation) Motto In God We Trust(since 1956) (From Many, One; Latin, traditional) Anthem The Star-Spangled Banner Capital Washington, D.C. Largest city New York City National language English (de facto)1 Demonym American... The Iberian Peninsula, or Iberia, is located in the extreme southwest of Europe, and includes modern day Spain, Portugal, Andorra and Gibraltar. ... For other uses, see Milan (disambiguation). ... Capital Naples Government Monarchy King  - 1285-1309 Charles II  - 1815-1816 Ferdinand I History  - Established 1285  - Union with Sicily 1816 The Kingdom of Naples was an informal name of the polity officially known as the Kingdom of Sicily which existed on the mainland of southern Italy after of the secession... Sicily ( in Italian and Sicilian) is an autonomous region of Italy and the largest island in the Mediterranean Sea, with an area of 25,708 km² (9,926 sq. ... Sardinia (pronounced ; Italian: ; Sardinian: or ) is the second-largest island in the Mediterranean Sea (after Sicily). ... Region flag Region logo Location Administration Capital Regional President Departments Doubs Haute-Saône Jura Territoire de Belfort Arrondissements 8 Cantons 116 Communes 1,786 Statistics Land area1 16,202 km² Population (Ranked 20th)  - January 1, 2007 est. ... This article or section should be merged with Seventeen Provinces The Spanish Netherlands was a portion of the Low Countries controlled by Spain from the sixteenth to the eighteenth century. ... Habsburg (sometimes spelled Hapsburg, but never so in official use) was one of the major ruling houses of Europe. ...


19th - 20th centuries

Prior to and during most of the 1800s international trade was denominated in terms of currencies that represented weights of gold. Most national currencies at the time were in essence merely different ways of measuring gold weights (much as the yard and the metre both measure length and are related by a constant conversion factor). Hence some assert that gold was the world's first global currency. The emerging collapse of the international gold standard around the time of World War I had significant implications for global trade.


In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged against the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar a global currency. The Bretton Woods system of international economic management established the rules for commercial and financial relations among the major industrial states. ... A fixed exchange rate, sometimes (less commonly) called a pegged exchange rate, is a type of exchange rate regime wherein a currencys value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. ... USD redirects here. ... GOLD refers to one of the following: GOLD (IEEE) is an IEEE program designed to garner more student members at the university level (Graduates of the Last Decade). ...


Since the collapse of the fixed exchange rate regime and the gold standard and the institution of floating exchange rates following the Smithsonian Agreement in 1971, currencies around the world have no longer been pegged against the United States dollar. However, as the United States remained the world's preeminent economic superpower, most international transactions continued to be conducted with the United States dollar, it has remained the de facto world currency. A fixed exchange rate, sometimes (less commonly) called a pegged exchange rate, is a type of exchange rate regime wherein a currencys value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. ... For other uses, see Gold standard (disambiguation). ... A floating exchange rate or a flexible exchange rate is a type of exchange rate regime wherein a currencys value is allowed to fluctuate according to the foreign exchange market. ... The Smithsonian Agreement was a December 1971 agreement that ended the fixed exchange rates established at the Bretton Woods Conference of 1944. ... Superpowers redirects here. ... De facto is a Latin expression that means in fact or in practice. It is commonly used as opposed to de jure (meaning by law) when referring to matters of law or governance or technique (such as standards), that are found in the common experience as created or developed without...


Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, for a while, the Japanese yen became increasingly used as an international currency, but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has competed with the United States dollar in usage in international finance. Yen redirects here. ... For other uses, see Euro (disambiguation). ...


Hypothetical single "true" global currency

An alternative definition of a world or global currency refers to a hypothetical single global currency, as the proposed Terra, produced and supported by a central bank which is used for all transactions around the world, regardless of the nationality of the entities (individuals, corporations, governments, or other organisations) involved in the transaction. No such official currency currently exists for a variety of reasons, political, economic, and cultural. Terra is the name of a possible world currency. The concept is currently proposed by Belgian economist Bernard A. Lietaer and is based on the historic proposal of LEuropa. ... In English usage, nationality is the legal relationship between a person and a country. ...


There are many different variations of the idea, including a possibility that it would be administered by a global central bank or that it would be on the gold standard.[3] Supporters often point to the euro as an example of a supranational currency successfully implemented by a union of nations with disparate languages, cultures, and economies. Alternatively, digital gold currency can be viewed as an example of how global currency can be implemented without achieving national government consensus. For other uses, see Gold standard (disambiguation). ... For other uses, see Euro (disambiguation). ... Digital gold currency (or DGC) is a form of electronic money denominated in gold weight. ...


A limited alternative would be a world reserve currency issued by the International Monetary Fund, as an evolution of the existing Special Drawing Rights and used as reserve assets by all national and regional central banks. IMF redirects here. ... Special Drawing Rights (SDRs) is a potential claim on the freely usable currencies of International Monetary Fund members. ...


Arguments for a global currency

Some of the benefits cited by advocates of a global currency are that it would:

  • Eliminate speculation in Forex since there is a need for a currency pair to speculate.
  • Eliminate the direct and indirect transaction costs of trading from one currency to another.[4]
  • Eliminate the balance of payments/current account problems of all countries.
  • Eliminate the risk of currency failure and currency risk.
  • Eliminate the uncertainty of changes in value due to exchange-caused fluctuations in currency value and the costs of hedging to protect against such fluctuations.
  • Cause an increase in the value of assets for those countries currently afflicted with significant country risk.
  • Eliminate the misalignment of currencies.
  • Utilize the seigniorage benefit and control of printing money for the operations of the global central bank and for public benefit.
  • Eliminate the need for countries or monetary unions to maintain international reserves of other currencies.

Forex can relate to: Foreign Exchange - an abbreviation for Foreign Exchange, often used in relation to currency exchange markets. ... In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. ... The balance of payments is a measure of the payments that flow from one exports and imports of goods, services, and financial capital, as well financial transfers. ... Blue = countries in current account surplus; Red = countries in current account deficit, 2005 The current account of the balance of payments is the sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as... Currency risk is a form of risk that arises from the change in price of one currency against another. ... It has been suggested that this article or section be merged into Hedge (finance). ... Country risk refers to the likelihood that changes in the business environment adversely affects operating profits or the value of assets in a specific country. ... Seigniorage, also spelled seignorage or seigneurage, is the net revenue derived from the issuing of currency. ...

Arguments against a single global currency

Some economists[who?] argue that a single global currency is unworkable given the vastly different national political and economic systems in existence.


Loss of national monetary policy

With one currency, there can only be one interest rate. This results in rendering each present currency area unable to choose the interest rate which suits its economy best. If, for example, the European Union were to have an economic boom while the United States slumped into a depression, this period would be eased if each could choose the interest rate which best fitted its needs (in this case, a relatively high interest rate in the former, and a relatively low one in the latter). In economics, the term boom and bust refers to the movement of an economy through economic cycles due to changes in aggregate demand. ...


Political difficulties

In the present world, nations are not yet able to work together closely enough to be able to produce and support a common currency. There has to be a high level of trust between different countries before a true world currency could be created. A world currency might even undermine national sovereignty of smaller states.


A currency needs an interest rate, while one of the largest religions in the world, Islam, is against the idea of interest rate. This might prove to be an unsolvable problem for a world currency, if religious views concerning interest do not moderate. This is not necessarily a fatal flaw however, as a large number of religious adherents who oppose the paying of interest are still currently able to take advantage of banking facilities in their countries which are able to cater to this. An example of this might be Islamic banking, which operates well enough in nations where the central bank sets interest rates for most other transactions. Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. ...


Having an interest rate is a key part of a (western) market economy. Depositing of money is important because it lets the money be lent out where it is needed most, for instance when establishing a new company or buying a house for a family. In order to get strangers to lend each other money the creditor needs to get compensated for their risk taken and their good will. If not, the tendency would be to just spend the money, to keep it, or invest it somewhere else. Other methods of circumventing the use of interest rates usually involve a pre-agreed amount of profit for the lender on a lump-sum rather than cumulative interest basis. This is widely used in the Islamic world to avoid paying or receiving interest. The profit on a business transaction (in this case, lending money) is known at the outset, and is a fixed amount, never a floating percentage of the sum lent.


Economical difficulties

Some economists argue that a single world currency is unnecessary, because the U.S. dollar already provides many of the benefits of a world currency while avoiding some of the costs.[5]


If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency. In economics, an optimum currency area (OCA), also known as an optimal currency region (OCR), is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. ...


A further argument is most easily conveyed by an analogy. Water carried in a biscuit baking pan will rapidly flow from high points to the lowest point, causing a sudden uncontrollable imbalance that forces the high points higher and the low point lower. The same quantity of water in cups on the biscuit pan will have no such inherent instability. Hegemonic currencies, free of regional limitations, flow rapidly away from high risk areas exacerbating their problems disproportionately to original causes. Such events are very damaging to the prosperity of the affected area. See for example the events leading up to, and subsequence consequences of the Corralito in Argentina. For those with the power to do so, predicting, or even causing, such capital flights can lead to immensely profitable speculations; so profitable indeed that their likelihood of occurrence increases in proportion with the scale of the currency involved. Corralito was the informal name for the economic measures taken in Argentina during 2001 by economy minister Domingo Cavallo in order to stop the draining of bank accounts. ...


See also

Digital gold currency (or DGC) is a form of electronic money denominated in gold weight. ... Special Drawing Rights (SDRs) is a potential claim on the freely usable currencies of International Monetary Fund members. ... This article is in need of improvement. ... The World Currency Unit (WCU) is an indexed unit of account (unit of account) that stands for a unit of stable global purchasing power. ... Please wikify (format) this article as suggested in the Guide to layout and the Manual of Style. ...

References

External links


 
 

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