Ok, so we just learned a bunch of stuff about central banks and why they are kind of a big deal when it comes to the Forex market. And while we do want to give you a little more about the Federal Reserve, we think we should make a quick pit stop and talk a bit about why the U.S. Dollar is such a big deal when it comes to the Forex market.
In this Article:
- The United States of America is the World’s Largest Economy
- The U.S. Dollar is the World Reserve Currency
- Largest Most Liquid Markets
- Stable Politics
- Military Super Power
Let’s now take a deeper look a few of the many reasons why the U.S. Dollar is the King of the Forex market:
The United States of America is the World’s Largest Economy
At the time of this writing (early 2018), the United States of America is currently the world’s largest economy. Yes, China is making a big push at dethroning the U.S., but, it would be unlikely to have too much of an impact on the currency as we currently know it. This is because China basically has a controlled currency. Controlled currencies are not really something that we can trade with any level of consistency. Maybe there is a way but it’s probably better to stick to the fundamentals.
The U.S. Dollar is the World Reserve Currency
The U.S. Dollar is the world reserve currency. This means that almost all other nations will need to own the U.S. Dollar in order to be able to do business with the United States of America.
All G8 nations keep a ton of American currency in their reserves so that they have this value as a hedge against their own currency weakening. It’s a way of keeping purchasing power in line with the rest of the global economies.
The US dollar is also the medium for most cross border transactions. So, what does that mean? For example, if Mexico wants to buy oil from Saudi Arabia they can currently only do so in U.S. Dollars. This means that Mexico would have to sell its native currency, the Mexican Peso, in order to buy U.S. Dollars to then go ahead and purchase oil from Saudi Arabia. This further highlights why most countries keep large reserves of the Greenback.
Largest Most Liquid Markets
The United States has the largest and most liquid financial markets in the world. They also happen to be some of the longest standing financial markets on the global financial scene. We wouldn’t say that they are perfect but when compared to the other options available they are attractive under most circumstances. The exception being when there is some sort of banking or financial crisis. However, when this stuff happens you can bet that most other markets are eating the same nasty tasting sandwich! This is because the world’s financial markets are highly linked in this modern day and age.
Stable Politics
The US political system is “likely” one of the most stable on the planet. We say likely because every once in a while a, let’s call it, “controversial person” such as the Donald Trump becomes the president. However, over the past hundred years or so the US political system is widely considered very stable.
There is a low history for things like snap elections in the middle of terms. And although there have been some scandals from time to time, they are no worse than some that have happened in other large economies. Even though the United States does not win number one in all categories, they are at the top in most of them.
Military Super Power
At the time of this writing, the United States is currently the world’s unmatched military super power. There is no other country that can match the United States military capabilities but this could obviously change over time. Their technology is amongst the best and they have a huge active military.
For all these reasons combined this makes the U.S. Dollar, U.S. related data, and U.S. economic indicators extremely important no matter what currencies you may be trading at any given time. Any news or information relating to the U.S. Dollar will have an impact on almost all other currencies to some degree because it is estimated that the U.S. Dollar is involved in at least 70% of all currency transactions on a daily basis.
As we have already talked about, most liquidity in virtually all markets come from speculators who are only trading for a profit. This is especially true in Forex markets because speculative traders account for roughly 90% of all volumes transacted on a daily basis.
Despite the negative press and media attention attached on speculative trading we know that it’s actually crucial for the entire financial system to run smoothly on a day-to-day basis. So we as speculators need to make sure we are up to date on the latest economic and political forces coming out of the United States if we want to have an accurate and complete picture of the fundamental and sentiment situation.
Up Next:
Now that we know about the U.S. Dollar, we are now going to take a more intimate look at the Federal Reserve. This is important because the Federal Reserve controls the U.S. Dollar and the money supply.