Why the US Dollar Remains the World's Strongest Currency

The strength of the United States dollar has puzzled and fascinated economists, investors, and policymakers alike. Despite recurring fiscal challenges, trade deficits, and political polarisation, the dollar continues to dominate the global financial system. Its value is not merely a reflection of current economic performance, but also the result of historical circumstances and structural advantages that have entrenched it as the world's most powerful currency.

This article explores the historical roots and structural pillars that explain why the US dollar remains so strong, drawing on the legacy of Bretton Woods, the petrodollar system, and the absence of viable alternatives.

Bretton Woods Origins and Historical Supremacy

The dollar's privileged position dates back to the end of the Second World War. In 1944. delegates from forty-four allied nations gathered in Bretton Woods, New Hampshire, to design a new international monetary system. The outcome was the establishment of the US dollar as the anchor of global finance, pegged to gold at $35 an ounce, while other currencies were fixed to the dollar.

Although the gold standard collapsed in 1971 under President Richard Nixon, the foundations laid at Bretton Woods cemented the dollar's supremacy. By then, global trade, investment, and reserves were already heavily dollarised, creating a momentum that survived the transition to fiat money. This historical starting point continues to shape the international system today.

Entrenchment in Global Systems

Over the decades, the dollar became deeply embedded in the arteries of global finance. It is now the dominant currency for trade invoices, cross-border lending, and financial transactions. For instance, commodities such as copper, wheat, and oil are routinely priced in dollars, regardless of whether the United States is directly involved in the trade.

This entrenched role has created powerful network effects: the more the dollar is used, the more valuable it becomes to participants in the global economy. Firms prefer to invoice in dollars to reduce exchange rate risks, while banks and investors find dollar-based assets more liquid and widely accepted. As a result, the dollar's influence extends far beyond America's own borders.

Swift Convertibility and the Petrodollar System

One of the dollar's great advantages lies in its convertibility. Dollars are readily exchanged across global markets, making them a convenient medium for international trade. This liquidity is underpinned by the scale and depth of the US financial markets, which remain unmatched in their accessibility and reliability.

Another key structural feature is the so-called petrodollar system. Since the 1970s, major oil-exporting nations have priced their exports almost exclusively in dollars. This has ensured a constant baseline demand for the currency, as every nation seeking to purchase oil – the world's most vital commodity – must first acquire US dollars. The recycling of these petrodollars into US assets further reinforces the dollar's dominance.

No Viable Alternative Currency

While critics occasionally suggest that the euro, the Chinese renminbi, or even digital currencies could replace the dollar, no contender has yet come close to matching its global role. The euro is constrained by political fragmentation within the European Union, while the renminbi is limited by China's capital controls and lack of transparency. Cryptocurrencies, meanwhile, lack the scale, stability, and institutional trust necessary to function as reserve assets.

Thus, despite its imperfections, the dollar remains the least flawed option in the international monetary system. This absence of a credible alternative means global demand for the dollar endures almost by default.

Dollar-Based Global Infrastructure

The architecture of global finance is built around the dollar. Payment systems such as SWIFT, international settlement networks, and correspondent banking channels are largely dollar-based. This infrastructure ensures that financial transactions across continents, whether in trade or investment, often pass through dollar-denominated systems.

Such embeddedness creates a form of path dependence: switching away from the dollar would require not only new policies, but also the costly reconstruction of entire systems of settlement, clearing, and risk management. As a result, inertia favours the continued use of the dollar.

Sustained Demand from Central Banks and Institutions

Finally, central banks and global financial institutions provide constant support to the dollar's value through their reserve holdings. According to the International Monetary Fund, roughly 58% of global foreign exchange reserves are still held in dollars, far surpassing any rival currency.

This sustained demand is not just a reflection of tradition; it is a rational choice. Holding dollars offers liquidity, safety, and access to the vast US Treasury market. For smaller economies, it also provides a buffer against volatility, ensuring stability in times of crisis.

Conclusion: A Currency with Deep Roots

The strength of the US dollar cannot be explained by short-term economic performance alone. Instead, it is the product of historical decisions, structural advantages, and systemic inertia that have elevated it above all competitors. From the Bretton Woods system to the petrodollar regime, from global payment networks to central bank reserves, the dollar has woven itself into the very fabric of international finance.

For now, and likely for decades to come, the dollar's supremacy remains intact. Its resilience is not just about the might of the US economy, but about the unique position it occupies in the global system – a position that history, structure, and habit have made extraordinarily difficult to dislodge.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.