If we subject different currencies to PPP that is power parity purchase ratio then the dollar is significantly the leading one amongst different currencies of the world. We cannot neglect the value of how many peonies in $100 that easily. But have you ever thought about why the dollar is so firm in terms of its power in the international market? Well, several factors decide the high value of a dollar as compared to other currencies of the world. Have a look at them below, here is a list of major five such factors which explain the reason for the high value of the dollar in the global market.
5 main reasons why the dollar is a powerful currency in the world
Here is a list of the top 5 main reasons why the dollar is a powerful currency in the world. You will come to realize that these are the main reasons behind the strength of any currency and not just the dollar only.
1. The economy is deciding factor
We all know that economy of a country decides its currency value and so is the case with the dollar as well. America is an economically stable nation that cannot be subjected to any doubt. Its trade, export, and other industries like Arms and ammunition are something that brings a lot of forex reserve to the country every year. As a result of which the economy is at a highly stable stage for the nation. That is the first and foremost deciding factor for the high and powerful value of the dollar in currencies.
2. Low inflation
The next factor which finalizes the high value of the dollar in the currency market is the low inflation rate of the currency. The central financial institution which is the federal bank keeps a check on the inflation rate of the dollar from time to time and never lets it bite the dust. That is why the strength of the dollar in the market never fades away for a long while now.
3. The negligible trade deficit of the country
A trade deficit is a deficit when a country import more as compared to export. But this trade deficit for America is also negligible as compared to other countries of the world. That is another great factor that is responsible for the high value of a currency like a dollar in the global market.
4. High demand for the dollar in the international market
Too many people visit the nation for different purposes like education, job opportunities, tourism purpose, etc. As a result of which all of them need to exchange their domestic currency for dollars. This increase the demand for the dollar in the market and chain and the supply theory of economic enhances the value of the dollar in this way.
5. Internal and external security from war
When a country is least worried about the external and internal threats of security to it, the value of currency touches the sky. Similar is the case with America too where the threat to the security of the nation is very rare and we can see people are living a secure life there. So this is another factor that leads to an increase in the value of the dollar in the international market as compared to other currencies.
6. High rate of interest in the central bank of the USA
The rate of interest that is charged by the central bank of the USA is also higher as a result which also makes the value of the dollar high. This is because when the rate of interest will be higher, people will refrain from taking loans at high interest from commercial banks. The money in circulation will decrease and it will again work on the funda of supply and chain.
The low supply increases the demand for the dollar which makes it more valuable in the market. That is the entire system that makes the dollar strong than other currencies. Other countries cannot execute such high-interest rates as they have to give loans for better business ventures and infrastructure development. The USA is having world-class infrastructure and thus it does not need to lend money to the people.
Conclusion
So these are the main deciding factors that make a dollar a strong currency. You can see
how these factors affect the high value of the dollar in the international market. Other countries have their limitations to follow the same path owing to poor infrastructure, poverty, population, and much more. We can see America is making a good trade in the market in a few decades because of its Arm industry and which is the biggest industry in the world. Others are just importing them from America and making the value of the dollar even stronger. This is not going to stop if people will put a period of import from America. That is how the value of currencies can be manipulated to a certain extent.
