A global currency is a currency by which majority of international businesses are transacted and which serves as the world’s primary reserve currency.
Before the Bretton Woods Conference of 1944, the world’s reference currency was the United Kingdom’s Pound Sterling.
The US Dollar
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 as a global currency.
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, most currencies around the world are no longer 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 and it has remained the de facto world currency.
However, as the United States economy deteriorates over the years, two serious challengers to the status of the United States dollar, namely the Japanese Yen and the Euro, as a world currency have arisen. During the 1980s, the Japanese Yen became increasingly used as an international currency, but that usage diminished with the Japanese recession in the 1990s. Since the launch of the Euro in 1999, the Euro has increasingly competed with the United States dollar in international finance.
Many of the world’s currencies are pegged against the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further to eliminate their own currency in favor of the United States dollar. The U.S. dollar continues to dominate global currency reserves, with 63.9% held in dollars, as compared to 26.5% held in euros.
The Euro
Since 1999, the dollar’s dominance has begun to be eroded by the euro, which represents a larger size economy, and has 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 as banks seek to diversify their reserves and trade in the euro-zone continues to expand.
As with the dollar, some of the world’s currencies are pegged against the euro. They are usually Eastern European currencies like 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, Monaco, Montenegro, San Marino, and Vatican City.
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 (today equivalent to circa US$968 billion).
However, the recent euro-zone crisis has developed new opinions about the euro currency as a reserve currency and the continuous deterioration of the US economy have renewed calls for a new global reserve currency.
Andrew Michael Teo 