When the US dollar hits a record high in September 2022, many low-income countries that rely on the currency find themselves in difficulty and, in some cases, in economic and political crisis.
The US dollar is the world’s dominant currency and plays an important role in global trade.
While that sounds like good news for Americans, it’s bad news for most of the rest of the world.
“So this is a paradox. The rest of the world underestimates how dominant the dollar is, but they go to the US dollar, because there really aren’t many alternatives,” said Eswar Prasad, economist at the Brookings Institution and professor. and Cornell University.
Despite constant predictions about the fall of the dollar, almost 60% of the world’s central banks’ foreign exchange reserves – money held to cover unexpected financial emergencies – are invested in dollar-denominated assets.
The share of the US dollar as a payment currency in the world is more than 40%, while it makes up more than 60% of international debt and 50% of loans in the world.
In addition to being an important currency for international financial transactions, commodities such as oil are also bought and sold in US dollars.
The dominance of the dollar in transactions also extends to the US banking system, which is also influenced by American fiscal and monetary policies.
“This will eventually increase the dominance of the dollar even more,” Prasad said. “This is certainly a serious problem for low-income countries with high external debt, especially dollar-denominated debt.”
Watch the video above to learn how the strong dollar contributed to the economic and political crisis in Sri Lanka.