The US dollar is undoubtedly the “world currency”. Not only is it the most recognized of all the currencies in the world, but it is also one of the most powerful. Forex traders around the world are closely watching the movements of the US dollar whether they are trading the greenback or not.
But what gives the greenback this unusual status in the world of forex trading? There are various factors involved in developing this status, and each of them is worth taking a close look at, even if you are not invested in the dollar. This article will deepen these explanations.
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History: Bretton Woods Agreement
While the dominance of the U.S. dollar in modern times just appears to be the product of many relatively recent forces, the reality is that the dollar’s position was anchored by a deal made decades ago. As World War II ended, it became evident to world leaders that a new system of managing exchange services was needed to ensure that the Western Allies did not leave any of them in the dark. cold.
The Bretton Woods Agreement was the consequence. Rather than pegging the value of world currencies to the commodity of gold, which had happened before and was known as the “gold standard”, currencies could be pegged to the value of the dollar. . The dollar itself was linked to gold, so there was always a link. And the Allies could, as a result, resell U.S. dollars to the U.S. and receive gold – although in return, the central banks of other countries had to cement the exchange rate between their own. currency and the greenback.
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The long-term result has been that the US dollar has created an integrated institutional dominance. Countries were suddenly prompted to have large backdrop stocks of US dollars instead of hordes of gold – which meant that demand for the dollar and US Treasuries exploded.
Fast forward: today
The words “Bretton Woods” are seldom on people’s lips, but the effects of this historic agreement endure. The reserves of central banks around the world are often structured around the US dollar: well over 60% of global foreign banks have their reserves in US dollars. These are usually either pure cash or bonds tied to the value of the dollar. And it is also the case that a large part – but not the majority – of the world’s debt is also in US dollars.
The role of the US economy
But the historical forces that led from the Bretton Woods agreement to the current central bank reserve system are not all that is relevant here. It is also true that the strength of the US economy comes into play in several ways. At surface level, information about the size of the US economy leads many traders to think it is almost unassailable when it comes to confidence. With a nominal gross domestic product (GDP) of $ 21.43 billion and a GDP per capita of $ 65,298, few countries in the world can stand up to it. For forex traders, these kinds of statistics suggest that there will always be an inbound supply when it comes to business investment in the United States, and the ripple effects for the currency are clear.
But there are deeper economic reasons why the US dollar remains so reliable. Businesses and governments want to be sure their debts will be repaid if they contract with a country’s economy, and high levels of confidence and demand for the US dollar suggest the country is unlikely to become insolvent anytime soon. What is remarkable for many analysts is that this perception persists even though the United States is a heavily indebted nation. It has embarked on big spending programs in recent years, especially when it comes to programs like coronavirus response programs.
What does this mean for a trader?
For traders, therefore, it is clear that the performance of the dollar should never be ignored. When the dollar moves, the global economy moves too – and the entire forex market can be affected by what the dollar does. While movements in the forex markets cannot be predicted with certainty, there are often times when the dollar rises in times of global uncertainty as traders seek to consolidate their holdings in a currency that can be easily exchanged for cash. . When the market is less risk averse, demand for the dollar – and therefore its value – tends to decline.
If you are trading the dollar as part of your pairs, it is important to watch it. But even if you don’t, it’s still essential to keep an eye on the dollar’s performance. This can be a testament to the underlying health of the forex market at large and the world economy at large – and, as a trader, these are two trends you need to watch out for. A good broker, like those recommended for their Forex Security levels by a reputable site like ForexFraud, should have a range of tools available to monitor the dollar on both a technical and fundamental basis.
In short, the US dollar has the strengths of history and the present on its side when it comes to establishing and maintaining its place as the primary global currency. The Bretton Woods Agreement established the greenback as the world’s reserve currency, and the currency subsequently persisted in its strength. Nowadays, the fact that the dollar is tied to one of the most prosperous economies in the world gives it a level of confidence that very few, if any, other currencies can claim.
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