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Suppose, a country X trades with another country Y using Y's currency rather than widely used international currencies such as USD or EURO.

E.g., Uzbekistan trading in Indian Rupee, Bangladesh trading in Saudi Riyal, Sri Lanka trading in Bangladeshi Taka, etc.

Does X lose anything?

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  • $\begingroup$ The Chinese renminbi is a widely used international currency. $\endgroup$
    – AKdemy
    Jul 13, 2023 at 2:35

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No, "X" shouldn't loose anything. While for "Y" it is an advantage (no exchange commission), the expected cost for the firm from country X should stay the same.

So why to trade in USD rather than in Taka? How we explain that more than 80% of international trade is made in USD? The reason is related to the stability and reliability of USD. In fact, if a firm commits herself to pay a certain amount of money in Taka (remember that, from the moment in which the agreement is made to the moment in which the payment is made a considerable amount of time passes), you have no idea of what the value of the Taka will be at the time of the payment because of its instability: for instance Taka value passed from an exchange rate of around 94 per USD in July 2022 to around 107 per USD today (july 2023). That's a big increase in expenses!

On the other hand, USD is backed by strongest economy in the world, which should guarantee stability of its value. Furthermore, not only you know that, but you know that everyone alse thinks that it is stable, further contributing to stabilize its value.

Of course USD value fluctuates over time, but far less than other currencies, decreasing risks for both importers and exporters, which is the reason why it is the most used currency.

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