{"id":312,"date":"2012-06-12T20:00:59","date_gmt":"2012-06-12T20:00:59","guid":{"rendered":"http:\/\/www.knowfinance.com\/?page_id=312"},"modified":"2012-06-12T20:00:59","modified_gmt":"2012-06-12T20:00:59","slug":"world-currency","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/world-currency\/","title":{"rendered":"World Currency"},"content":{"rendered":"

In the foreign exchange market and financial markets, the term world currency refers to that legal tender which dominates international transactions alongside serving as world primary currency reserve. World currency is also called global currency or supranational currency.<\/p>\n

Following economic crisis of 2009, China was the first country to demand that global economy should have a world currency. A UN panel of expert economists proposed changing the existing US dollar-based system by significantly increasing the\u00a0International Monetary Fund’s\u00a0special drawing rights.<\/p>\n

Depending on numerous properties, currencies can be characterized in many forms. \u00a0For example, advantages and disadvantages of currencies are dependent on the type of issuer, type of issuance, and type of backing.<\/p>\n

A particular relationship of these properties results in different types of currencies.<\/p>\n

Recent History<\/p>\n

Prior to 1944, United Kingdom\u2019s Pound Sterling used to be world currency.<\/p>\n

US Dollar-Following the\u00a0Bretton Woods Conference\u00a0in1944,\u00a0countries around the world started to peg their currencies against the U.S dollar which could be exchanged for a fixed amount of gold. As a result the U.S. dollar became a dominant currency of the world.<\/p>\n

After the collapse of the\u00a0fixed exchange rate\u00a0regime and the\u00a0gold standard and the subsequent establishment of\u00a0floating exchange rates following the\u00a0Smithsonian Agreement\u00a0in 1971, nearly every currency around the world was no longer pegged against the United States dollar.<\/p>\n

Nevertheless, as the United States continued to remain superpower of the world, dominating in every spheres, almost all international transactions were being conducted with the United States dollar, and since then it has stayed as the\u00a0de facto<\/em>\u00a0world currency. In fact, the dollar has remained as the de facto currency since mid twentieth century.<\/p>\n

In the foreign exchange history, the status of the U.S dollar has been seriously challenged only twice even as its dominance has risen over the years.\u00a0 Back in 1980s, the\u00a0Japanese yen\u00a0was becoming increasingly used as an international currency however its usage ebbed with the Japanese recession in the 1990s.<\/p>\n

More recently the euro (prior to debt crisis of 2008) competed with the United States dollar in the world international finance.<\/p>\n

Robert Gilpin, a renowned economist, remarked in his book, \u201cGlobal Political Economy: Understanding the International Economic Order<\/em>\u00a0(2001)\u201d:\u00a0 that in the financial world, about 40 to 60% of the international financial transactions were carried out in U.S. dollars. Besides, for many decades the dollar has also been the world’s primary reserve currency; in 1996, the dollar accounted for about two-thirds of the world’s foreign exchange reserves.<\/p>\n

Lots of the world’s currencies are pegged against the U.S. dollar.<\/p>\n

Some of the Central American countries, such as Ecuador, El Salvador, and Panama, have gone even further and abolished their own currency in favor of the United States dollar. In the recent past, the U.S. dollar has continued to dominate global currency reserves, with 63.9% kept in dollars, as compared to 26.5% set aside in euros.<\/p>\n

A 2011 study on the current dominant reserve currency in central banks showed that dollar might not be the clear dominant currency, because of the major part of Unallocated Reserves reported by central banks.<\/p>\n

Euro<\/p>\n

Since euro was implemented in 1999, the U.S. dollar\u2019s dominance in the world currency exchange market has fallen down drastically.\u00a0 (By January 1, 2002, physical notes and coins were used all over the twelve euro zone member countries, substituting with local currencies.\u00a0 Later, during next five years, 2 five more EU member states entered the euro zone. )<\/p>\n

The euro zone economy became very large as countries such as France, Germany, and Spain entered into single monetary union. As result, financial markets started substituting the U.S dollar with euro as a currency reserve. Furthermore, the euro \u00a0also inherited the position of a major reserve currency from the\u00a0German mark\u00a0(DM), and since then its contribution to official reserves has increased as banks look out to diversify their reserves\u00a0 even as trade in the\u00a0euro-zone continued to expand.<\/p>\n

As with U.S. dollar, some currencies also peg against the euro such as the Bulgarian lev, including some West African currencies like the\u00a0Cape Verdean escudo\u00a0and the\u00a0CFA franc. Besides, there are some non EU countries such as Monaco, Andorra, San Marino and The Vatican City that have adopted the euro as their official currency following an agreement with the EU and ECB<\/p>\n

Countries like Montenegro and Kosovo have adopted the euro unilaterally. Nevertheless, any further unilateral adoption of euro both by non-euro EU and non-EU countries is prohibited by the EU and ECB.<\/p>\n

By December 2006, the euro surpassed the dollar in the combined value of cash in circulation. \u00a0In the same period, the value of euro notes in circulation has soared to more than \u20ac610\u00a0billion, equivalent to US$800\u00a0billion.<\/p>\n

However, with worsening euro zone debt crisis, which started in 2010, the euro has been under tremendous pressure as investors sought the safety of U.S. dollar.<\/p>\n

World Currency History and Current<\/p>\n

Spanish dollar in 17th<\/sup> and 18th<\/sup> centuries<\/p>\n

During \u00a0the 17th and 18th century, the circulation of silver\u00a0Spanish dollars\u00a0or “pieces of eight” extended from the Spanish territories in the Americas westwards to Asia and eastwards to Europe forming the first ever global currency. Spain’s political supremacy on the global arena, the significance of Spanish commercial routes across the Atlantic and the Pacific, together with coin\u2019s quality and purity of silver helped it become globally accepted for over two centuries.<\/p>\n

It was the official currency in Spain’s Pacific territories of the Philippines, Micronesia, Guam and the\u00a0Caroline Islands\u00a0and later on in China and other Southeast Asian countries until the mid-19th century. In the Americas it was official currency in all of South and Central American countries, (excluding Brazil) as well as in the US and Canada until the mid-19th century.<\/p>\n

In Europe, the territories that accepted the Spanish dollar as a legal tender included: the\u00a0Iberian Peninsula, in major part of Italy such as Milan, the\u00a0Kingdom of Naples, Sicily,\u00a0Sardinia, the\u00a0Franche-Comt\u00e9(France), and in the\u00a0Spanish Netherlands. \u00a0It was also adopted in several other European states including the Austrian\u00a0Habsburg territories.<\/p>\n

In 1788, when the colony of New South Wales was founded in Australia, it ran into a trouble due to lack of coinage. Consequently, Governor Lachlan Macquarie brought forward the idea of using \u00a310,000 in Spanish dollars sent by the British government to mint suitable coins. The minters simply punched out the centers of the coins. While both the central plug and rims were stamped with a sunburst.<\/p>\n

The punched centers were used as the shillings and the outer rims were circulated as five-shilling pieces. The mutilated coins were subsequently no longer acceptable outside of the island, so as an end result, became the legal tender there. These coins to the value of 40,000 Spanish dollars arrived on 26 November 1812 on the merchant ship the Samarang from Madras, through the Honorable East India Company. To stop them from leaving the colony the centers were punched out to make two different issues of coins.<\/p>\n

There was a central plug (called as a dump) which was priced at 15 pence and was re-struck with a new blueprint (a crown on the face, the denomination on the back), even as the dollars received an over stamp around the hole (“New South Wales 1813” on the face, “Five Shillings” on the reverse). The holey dollar became the first legal currency produced exclusively for circulation in Australia.<\/p>\n

Besides these two currencies, there are other coins\/currencies that have been used over the centuries. The Austrian\u00a0Maria Theresa thaler\u00a0is accepted still in some back areas of the Middle East and Africa. These coins were first issued in 1741. There was also the Roman Denarius, which remained as world\u2019s dominant currency for hundred years.<\/p>\n

Gold Standard (19th<\/sup> \u2013 20th<\/sup> centuries)<\/p>\n

Before and in most part of the 19th century, global trade was denominated in terms of currencies that corresponded to weights of gold. Most national currencies at the time were simply the different measures of gold weight. Therefore, some stress that gold was the world’s first international currency. The subsequent collapse of the international gold standard around the time of World War I had considerable repercussion for global trade.<\/p>\n

Recently proposed (21st century)<\/p>\n

On 16 March 2009, following \u00a0the\u00a0April 2009 G20 summit \u00a0in the\u00a0Kremlin, the council stressed the need for a global reserve currency \u2013 a move aimed at \u00a0reforming \u00a0the global financial system. In a document which included proposals for the G20 meeting, it recommended that the\u00a0International Monetary Fund\u00a0(IMF) (or an Ad Hoc Working Group of G20) should be asked to carry out specific studies to evaluate the following options:<\/p>\n