The Dollar’s Global Role in Forex

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The US Dollar is the common denominator between all of the different types of currency pairs, exotics, major crosses and other major currency pairs. Let’s have a look as to why this is.

  1. Bretton Woods Agreement: In 1944, 44 Countries met in Bretton Woods. New Hampshire to create a worldwide Dollar Standard and the International Monetary Fund. The US Dollar, then backed by Gold, would be the worlds currency for international transactions. Nations would trade Dollars between each other throughout the year. But at the end of each year, the Dollars would be redeemed for Gold, through the IMF.
  2. Political Risk: One of the driving forces behind the dollar’s strength. The United States have not experienced any sort of political instability since the Civil War in the 1860s and before that, you’d have to look back to the American Revolution in the 1700s. Because of the United States’ Limited Political Risk, in comparison to it’s peers, it is considered a safe haven for investment capital and dollars are accepted all around the world.
  3. Commodity Currency: While the United States are not an active producer of major commodities, a 1970s agreement with Saudi Arabia chained the oil market to the dollar. Since that time, nearly 100% of all oil bought and sold around the world is priced in US Dollars. Because oil can only be purchased with American Dollars, International Organizations, businesses and governments are willing to hold onto the US Dollar. Everyone needs oil, so everyone needs the US Dollar.
  4. Financial Markets: The United States financial Markets are some of the of the most established. The New York Stock Exchange, NASDAQ exchange, commodities exchanges, as well as the world’s largest banks, operate as American Businesses. As such, many companies list their stock in the United States, even if they are not an American Company. With so many businesses engaging in the US capital and currency Markets, investors find that holding dollars simply makes sense. It’s the only currency used in the US financial markets.
  5. Relative International Importance: The United States is the world’s largest economy. In 2010, US Businesses, individuals, State and local governments accounted for 17% of all goods and services produced around the world. This helps solidify the Dollar’s strength in the forex market, since the Dollar is required to do business in the United States, the world’s largest economy.

While there is plenty of discussion about removing the United States Dollar as a global reserve currency, very little has been done to turn talk into action. In fact, during many of the mass turn downs in the world economy – the Asian Financial Crisis, the Global financial crisis in 2008 and other before them – the world has fled to dollars as a safe place to store wealth.

US Dollar as a Reserve Currency >