Why the dollar is the most powerful currency, although it is not the most expensive

Among the world’s basket of currencies, the US dollar is in a privileged position, although it is not the most expensive in the world. In fact, in the list of currencies with the highest value it is surpassed by the British Pound or the Euroamong other.

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The dollar only appears in the list of the ‘strongest’ in the last positions of the ‘top’ 10. However, it is considered the most powerful in the world. So what is the reason for her power?

The reasons for its importance in the foreign exchange market are multiple, but the most outstanding factor has to do with its tradability, since it is the most widely traded currency in the world.

“The United Kingdom may have a much more expensive currency than the dollar, but it is not necessarily the currency with the greatest participation and power in the market, because it is not the most used for international transactions. The US has a large number of businesses that make its currency used practically all over the world and for this reason it continues to be the one that has the most impact on a global level”says Jeisson Balaguera, executive director for Values ​​AAA.

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Thus, the currency’s tradability is also based on the robustness of the US economy, considered one of the world’s greatest economic and financial powers, since the more businesses its economy has, the more tradable its currency is.

Another important factor is your support. In the case of the United States, the dollar is backed by oil, unlike other currencies that are backed by gold or other metals.

According to Balaguer, The US strengthened its currency through commodities, which allows it to have a higher value, since oil is a tangible asset and its reserves have parity with dollar issues, which makes it more reliable for trading.

Among the reasons that explain the high influence of the dollar in Colombia, it stands out that All foreign trade business carried out in the country is handled under the figure of the terms of international negotiation (Incoterms), that are traded in dollars, which means that Colombia is tied to the issuance of US money or the rise in interest rates of the Federal Reserve (Fed), among other internal factors in the United States that impact Colombia.

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Also, Colombia has a very high foreign debt with the US, that due to the volatility of the dollar has caused it to increase, since it must be paid in dollars.

Likewise, the TES bond issues that Colombian governments have made in recent years on Wall Street have made the country more dependent on the US currency.

Although the dominance of the dollar remains very strong and in the short and medium term this trend is not expected to changemany analysts believe that China, with the policies it is implementing, is heading towards reaching, in a few decades, a greater dominance of the US regarding the currency because they are betting on the technological issue and the long term, something that for now seems unattainable for the rest of the coins in circulation.

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