1. Why the dollar is now the key currency

 Generally speaking, when you think of a base currency, you think of the US dollar a lot. The United States is a country that dominates the world economy, and once the United States wobbles, it has such a powerful influence that the global economy fluctuates, so it is very suitable as a key currency.


In addition, the dollar is the center of the world's currency, and the dollar is often used for international transactions and interbank settlements. The 1944 Bretton Woods Conference was the reason the dollar became the reserve currency. Allied forces in the West secured victory in World War II in June 1944 with the successful Normandy landings. The liberal democratic camp held talks in the United States in July 1944 to discuss post-war world restructuring. That's exactly the talks that came to recognize the dollar as a reserve currency. However, the Bretton Woods system, which came to recognize the dollar reserve currency, did not last long. The key to the Bretton Woods system was ample US gold reserves, but the trade deficit began to raise concerns about the convertibility of gold. Maintaining the value of the U.S. dollar became increasingly difficult, and it was forced to devalue twice in 1971 and 1973. In the end, it came to abandon the fixed exchange rate of each country's dollar. The Bretton Woods system would eventually collapse.


 The dollar continues to maintain its status as a reserve currency even after the collapse of the Bretton Woods system. Each country can choose its exchange policy according to circumstances, and the position of the dollar will not change. The United States still plays a superpower role by leveraging the dollar's status, and the scale of American consumption and investment far exceeds its output. In addition, the dollar, which is the key currency, can be used to raise funds at low interest rates in response to high demand for government bonds, allowing inflation and lowering the real value of debt. This privilege is a privilege that only the base currency has. Let's take a look at the meaning and history of key currencies.


2. Meaning of key currency and historical dollar coin

1) What is a key currency?

The key currency is the currency that forms the basis of international settlements and financial transactions, and was first named by Professor Robert Triffin of Yale University in the United States. Currently, the dollar maintains its position as the key currency as mentioned above. In order to become a key currency, four conditions must be met.


  •  Calls must have free convertibility or free transferability.


  • There must be strong international trust in the currency, and the stability of the currency value must be guaranteed.
  • Even with the above two conditions, there is a limit to the amount of money supply. Hmm.
  • The financial market of the country that holds the currency must be equipped with functions and organizations that allow it to fully perform its role as an international financial market.

2) History of key currency

 If you have a key currency, you can trade conveniently if you use it as the key currency instead of the currency of your own country or the currency of the other country when trading with foreign countries. Therefore, from a historical point of view, the money of the great powers has played a role as the key currency.

 

 Before the modern era, even if it was a powerful country, only the area around the relevant area could be included in the effective sphere of influence. A good example of this is the discovery of ancient Roman gold coins in the jungles of Africa. Since the Middle Ages, the Ottoman Empire enjoyed the status of a key currency, with silver coins having an influence over Europe, the Middle East, and even China. However, after Spain expanded into the African continent, a huge amount of silver came into Spain, and Spanish silver coins took over the position as the key currency. The beginning of the key currency in the world can be said to be the UK. The British pound was accepted as a key currency after the 17th century, the United States implemented the gold standard system, and the United States emerged as a superpower before World War I, and after World War II, it was widely used around the world. The colony was lost, and now the US dollar maintains its position.


3) Dollars silently survived the financial crisis

  The dollar became an undefeated currency after the collapse of the Bretton Woods system in 1944. The dollar's biggest financial crisis was during the 2008 financial crisis. The financial crisis that originated in the United States began with the collapse of real estate and caused a major collapse of the financial market system. It was the first time since the Great Depression that the US economy felt threatened. Many economists expected the Guru to depreciate the dollar, but now, ten years later, the result is the opposite.


 According to Goldman Sachs, the higher the Financial Conditions Index, the weaker the financial conditions. The 2008 financial crisis triggered by the United States, the 2011 credit rating downgrade, and the 2013 financial cliff all came out as a strong dollar. Investors began increasing the dollar's share of safe haven assets as uncertainty increased. Although the United States has increased its fiscal deficit and current account deficit, this is likely the reason why the dollar remains unchanged.


 What makes the dollar special is its status as a store of value. After the financial crisis, Europe and emerging economies became relatively poor, and the dollar's position as a safe haven asset became increasingly high. Countries around the world have come to rely on the dollar as a safe haven reserve. The euro and the yen follow closely behind, but are significantly underperformed by the dollar.


4) U.S. government bond issuance scale and liquidity are high

 Many countries consider the dollar as a reserve asset. We hold dollars by buying US Treasuries rather than buying the currency itself. Buying US Treasuries comes with a lot of opportunity costs, given that the 10-year Treasury yield is only below 1%. Given the increased demand for safe haven assets since the financial crisis, supply is severely lacking. After the financial crisis, the world increased the ratio of reserves required for safe assets in the process of reconstruction. Banks will have to meet the capital soundness standards required by BIS (Bank for International Settlements) in stages from 2013 to 2019. Government bonds of major developed countries can meet safe-haven requirements. The problem is the lack of government bond supply in other developed countries, except the United States.


 Only a few countries such as Germany, the Netherlands, and Norway have been given AAA ratings by S&P (S&P.Standard&Poor's). The amount of bond issuance is very short compared to the United States, and the amount of US government bond issuance is 4 trillion dollars, overwhelming other countries. The amount of Japanese government bonds issued is 9.5 trillion won, which is relatively large, but the investment costs of institutional investors such as domestic banks and pension funds are large. U.S. Treasury bonds offer attractive liquidity.


 Before the financial crisis, global corporations and banks acted as safe havens. Banks with venerable histories and companies that I thought were safe to go to every country went bankrupt. The US Federal Reserve (Fed) and US Treasury have adjusted their debt so that moral laxity is not pervasive throughout the financial crisis when bailing out companies. Although individual and institutional investors consider high-quality corporate bonds to be safe assets, there are not many corporate bonds that the government can consider purchasing when accumulating reserve assets. The United States is a factor that increases the attractiveness of government bonds. Developed countries have started devaluing their own exchange rates, rather, due to currency manipulation since the financial crisis. The risk of loss can be increased in situations where real interest rates are low due to the exchange rate. Dollar value rises in favor of safe haven assets even with quantitative easing. The perception that US Treasury bonds are safe has grown stronger.


 5) The United States has not experienced any major debt-related crises despite its current account deficit,The United States is a current account deficit country. 

A country that imports capital from other countries. A current account surplus means exporting capital. The United States has a current account deficit, with less savings than investment compared to output. Let us take the United States as a representative consumer country.


 China, on the other hand, is against it. China is a typical current account surplus country. Saving is more than investing. Developed countries such as Japan and Germany and emerging countries such as China are exporting funds to the United States. China's cumulative current account surplus is $3.2 trillion from 2000 to 2017, and has recorded a current account surplus every year since 1994. The scale of the surplus has increased sharply since 2005 when China joined the WTO (World Trade Organization) and began full-scale trade with the United States. Although China had a large inflow of private capital from developed countries, the outflow of funds from public institutions far exceeded it, and it turned into a capital exporter. I think it is highly likely that this is the result of increasing reserve assets through the purchase of US Treasuries. As long as emerging economies like China continue to buy US Treasuries, US consumption inflation is also highly sustainable.


 Despite its huge current account deficit, the United States has not done much to reduce the deficit. Former Fed Chairman Bernaking once expressed his view that high savings relative to investment in emerging countries is distorting the international financial system. The U.S. current account deficit is being blamed on emerging economies' excess savings. For the US, a current account deficit is very friendly to increasing national welfare, barring a debt crisis. When former President Trump launched a trade dispute on the pretext of reducing the trade deficit, economists around the world began to react very strangely. The US does not take its current account deficit seriously. The hot money outflow problem due to the current account deficit does not apply to the United States, which has a key currency. A current account deficit is synonymous with a capital account surplus. America can reinvest foreign money in high-value industries such as aerospace, biotechnology, and advanced military equipment and weapons. The key currency, the US dollar, has enabled the US to maintain its national competitiveness for a long time.


3. Why you should save your dollars

 The dollar is the world's key currency, and while the won, yen, and euro fluctuate, the dollar is a relatively stable currency. Also, if you have a certain amount of dollars, you can invest in overseas markets, do dollar tech, and become a source of investment in US stocks and even US ETFs. The good point is that it can be used effectively in trade. State-to-state trade is very important as it is mostly traded in the reserve currency, the dollar. Also, our country has few resources, so we need to store some dollars. Also, having experienced the IMF crisis, South Korea definitely understands the importance of foreign currency, and actually has a lot of foreign currency.