Learning about the Reserve Currency (ChatGPT4)

Basically this post is what I asked and learnt from chatGPT4, I'm just copy pasting from chatGPT4.

I thought it's actually good learning information that should be shared since this reserve currency topic has been getting trendy recently.

ChatGPT 4

When did US dollar becomes the world reserve currency and what happen to the previous world reserve currency?

The US dollar became the world's primary reserve currency after the Bretton Woods Agreement was signed in July 1944. The conference, held in Bretton Woods, New Hampshire, was attended by representatives from 44 Allied nations. The goal was to establish a new international monetary system to ensure economic stability and promote global trade in the post-World War II era.

Under the Bretton Woods system, the US dollar was pegged to gold at a fixed rate of $35 per ounce, and other major currencies were pegged to the US dollar. This arrangement allowed countries to convert their currencies into US dollars, which could then be exchanged for gold. The US dollar's convertibility to gold and the strength of the US economy contributed to its adoption as the primary reserve currency.

Before the US dollar took the lead, the British pound sterling was the dominant global reserve currency during the 19th and early 20th centuries. The pound sterling's prominence was due to the vast reach of the British Empire and London's position as the center of global trade and finance. However, two world wars and the decline of the British Empire led to a weakening of the pound's position in the global economy.

After the Bretton Woods Agreement, the pound sterling's importance as a reserve currency diminished, and the US dollar took its place. Over time, the British pound has remained a significant global currency, but its role as a reserve currency has been significantly reduced compared to the US dollar.

The Bretton Woods system itself ended in 1971 when President Richard Nixon suspended the convertibility of the US dollar to gold, effectively ending the gold standard. This decision led to the current system of floating exchange rates, where currencies are allowed to fluctuate in value against one another based on market forces. Despite the end of the Bretton Woods system, the US dollar has maintained its position as the primary global reserve currency due to the size and stability of the US economy, the liquidity of US financial markets, and the widespread use of the dollar in international trade and finance.

How does country currency specifically US dollars affect stock market?

The value of a country's currency, particularly the US dollar, can have a significant impact on the stock market, both domestically and globally. The US dollar is the world's primary reserve currency and is used for a large portion of international trade and finance. As such, fluctuations in its value can influence stock markets in various ways:

1. International trade and competitiveness: A stronger US dollar makes American goods more expensive for foreign buyers, which can lead to a decline in exports and negatively impact the revenues of US companies with significant overseas sales. Conversely, a weaker dollar can make American goods cheaper for foreign buyers, potentially boosting exports and benefiting companies with a substantial international presence. This dynamic can influence stock prices, as companies with higher revenues and profits often see their stock prices rise.
2. Commodity prices: Many commodities, such as oil and gold, are priced in US dollars. When the dollar strengthens, it takes fewer dollars to purchase the same amount of commodities, causing their prices to fall. Conversely, when the dollar weakens, commodity prices tend to rise. Since the stock prices of commodity-related companies, such as energy and mining firms, are influenced by commodity prices, fluctuations in the US dollar can impact their stock prices as well.
3. Foreign earnings translation: US companies with significant international operations report their earnings in US dollars. When the dollar is strong, earnings generated in foreign currencies are translated into fewer US dollars, which can reduce reported profits and potentially negatively impact stock prices. Conversely, a weaker dollar can lead to higher reported earnings when foreign revenues are translated into US dollars, potentially boosting stock prices.
4. Interest rates and capital flows: Changes in the value of the US dollar can influence interest rates and global capital flows. A stronger dollar may attract foreign investment, as investors seek to benefit from higher returns on dollar-denominated assets. This increased demand for US assets, such as stocks and bonds, can drive up their prices. Conversely, a weaker dollar may prompt investors to shift their assets to other currencies and markets, potentially leading to a decline in US stock prices.
5. Market sentiment: The value of the US dollar can also impact investor sentiment. A strong dollar can signal confidence in the US economy and may be supportive of stock market growth. However, if the dollar becomes too strong, it may dampen investor sentiment due to concerns about the negative effects on exports and corporate earnings.

In summary, the value of the US dollar can have wide-ranging effects on the stock market, influencing factors such as international trade, commodity prices, corporate earnings, and investor sentiment. Fluctuations in the dollar's value can create both opportunities and challenges for investors, who must consider the potential impacts on individual stocks and the broader market when making investment decisions.

What is the currency exchange rate between pound sterling and US dollar before and after Bretton Woods agreement?

Before the Bretton Woods Agreement, exchange rates between currencies, including the British pound sterling and the US dollar, fluctuated based on market forces and the gold standard, with both currencies tied to a specific amount of gold. However, the exact exchange rate between the pound and the dollar varied during different periods due to economic conditions, geopolitical events, and monetary policies.

In the early 20th century, before World War I, the exchange rate between the pound sterling and the US dollar was approximately £1 to $4.86. During the interwar period, exchange rates experienced significant fluctuations due to economic and political instability, including the suspension of the gold standard during the Great Depression.

After the Bretton Woods Agreement in 1944, exchange rates were fixed under the new international monetary system. The pound sterling was devalued in 1949, and the exchange rate was set at £1 to $2.80. This rate remained in place until the early 1970s, when the Bretton Woods system began to break down.

In 1971, President Richard Nixon suspended the convertibility of the US dollar to gold, marking the end of the Bretton Woods system and the beginning of the era of floating exchange rates. Since then, the exchange rate between the pound sterling and the US dollar has fluctuated based on market forces, economic conditions, and monetary policies. The exchange rate has experienced significant ups and downs over the years, and historical rates can be found through various sources like the Federal Reserve Economic Data (FRED) and the Bank of England.

What it takes for another country to become the reserve currency?

For a country's currency to become the global reserve currency, it must fulfill several key criteria that make it attractive and reliable for international use. These criteria include:

1. Economic size and stability: The issuing country should have a large, stable, and influential economy. A strong economy instills confidence in the country's currency and ensures that it can withstand fluctuations and shocks in global markets.
2. Liquidity: The currency should be widely available and easily convertible, which requires deep and liquid financial markets. This allows central banks and investors to easily buy, sell, or hold large amounts of the currency without significantly affecting its value.
3. Wide acceptance: The currency should be widely accepted for international trade and finance. This requires the issuing country to have strong trade ties and an extensive network of relationships with other countries.
4. Low inflation and stable exchange rates: A stable currency with low inflation rates is desirable for a reserve currency. Central banks and investors are more likely to hold and use a currency that maintains its value over time and does not experience significant fluctuations in exchange rates.
5. Trust in the issuing country's institutions: The country issuing the reserve currency should have a strong legal framework, transparent monetary policy, and a credible central bank. This fosters confidence in the currency and ensures that its value is not undermined by political interference or poor governance.
6. Network effects: A currency's status as a global reserve currency is reinforced by network effects. As more countries and institutions use and hold the currency, its desirability increases, which in turn attracts more users.

To replace the current global reserve currency (US dollar), another country's currency would need to meet or exceed these criteria and offer a more attractive alternative to the US dollar. This would be a challenging task, given the dominance of the US economy, the liquidity of US financial markets, and the widespread use of the dollar in international trade and finance. However, it is not impossible, as history has shown with the transition from the British pound sterling to the US dollar as the primary global reserve currency.

Personal Opinion

I don't think BRICS or the Chinese Yuan will become the reserve currency at least anytime soon (like 30-50 years?). Take a look at International Monetary Fund (IMF) - https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4

The US Dollars still sits at 58.36% followed by Euro at 20.47% while the Chinese Yuan is at 2.69%. It will take quite a lot of money flowing from one currency to another for anything to change. That's not gonna happen overnight easily. It might be something cooking but it's gonna cook for decades before anything can change.

Short term though, it might affect the US dollars to go down little but to a certain extend that's actually good for the stocks market. So overall, nothing much to be really concern about. Just another news that stirs the market.