Trading forex online requires not just a mastery of technical subjects, but a reasonable command over the fundamental aspects of trends and market events which form the basis of market action. Comprehending the role of the US dollar as the world’s currency and the basis of international trade and finance is crucial to forming a fundamental grasp of the market action. Why is the dollar so important? Why does so much of forex action is denominated in the dollar? What is the secret of the importance of this currency to so many traders around the world? In this article we’ll take a look at the reasons behind this fact.
US is the world’s finance central
Few traders nowadays can fail to be aware that the U.S. is the world’s financial center. In spite of the important role played by Japan, despite the sophistication of London, contrary to the allure of places like the Cayman Islands, or Switzerland as tax havens to individual investors and hedge funds, the numerous financial centers of the U.S. remain the most dominant actors in the world markets. In spite of the importance of locations like Frankfurt or London, and rising centers such as Shanghai, New York, and the associated U.S. market remain the most powerful, sophisticated and deep ones in the world. The fact that the Chinese government seeks the expertise of U.S. firms for IPOs of public companies over their competitors in different parts of the world is one of the many evidences that can be shown to prove that the U.S. remains the center of the world economy.
US is the world’s largest economy
The U.S. economy is of course the world’s largest, and much of the influence and power of the U.S. currency is a result of the size of the American giant. U.S. is the major trade partner of many nations in the world, and although regional trade is increasing in importance with the rise of nations like India or China, America still remains the most important partner of many nations in the world.
US is the world’s greatest political and military power
Some nations prefer to support the dollar in return for U.S. guarantees of economic and diplomatic support. During the Cold War era, this was an even more important factor, but even today, nations in the Gulf Region, Australia, Taiwan, and even to a lesser extent in Europe, explicitly or implicitly support the dollar in exchange for political support, or simply traditions that have grown over the past decades.
The world financial system was built by the US
Finally, the international finance system as we observe it today was built mainly by the United States after the Second World War. Organizations like the IMF, or the World Bank are all sponsored by the U.S. to a large extent, and they were conceived and created to function best in a dollar-based international economic system.
Dollar is the trade and reserve currency of the world
As the world’s most important currency in economic, and political terms, the dollar is also the world’s reserve currency. Nations conduct international transactions in the dollar, and central bank reserves are mostly quoted and managed in U.S. dollar terms. No one has any interest in seeing a sudden collapse in the value of the U.S. dollar.
These are some of the basic reasons that give the U.S. dollar long-term advantage over other candidates to the status of the world’s reserve currency. Among these the role of the currency in the global financial system, and the diplomatic and political power of the U.S. are the most important factors contributing to its prestige at the moment. No forex trading strategy can be complete in the long term without taking the important advantages of the dollar into account, and that is only achieved by a careful study of the factors that have made the dollar centerpiece of the world financial system today.