Why Does the Currency Market Always Involve the U.S. Dollar?

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Are you becoming curious why the currency market involve the U.S. dollar most of the time? It is apparent that almost all transactions involving currencies are tied to the dollar. If you are wondering why, this article will reveal the reason for this question. Read on to find out.

Why the U.S. Dollar?

The U.S. dollar is regarded as the reserve currency in the world. Most agricultural goods and commodities like the oil are appraised in U.S. dollars. Thus, if a country needs to purchase commodities like oil and agricultural products, it first needs to convert its currency in dollars before going on with the transaction.

For decades, the U.S. dollar has enjoyed a distinguished status as the leading currency in the world. Through the Bretton Woods agreement, the United States approved of a fixed rate of $35 per ounce of gold. However, past U.S President Richard Nixon altered the setup and began abandoning the gold standard as he believes it can ease inflation and alleviate unemployment. Hence, even after the Bretton Woods system, the U.S. dollar was able to maintain its status and has been regarded as the reserve currency. It is one of the many reasons why this currency holds its favored status until this day.

Moreover, issues with Europe and other nations have indeed proven that the United States dollar is a real economic safe haven.

What are the common currency pairs?

The common currency pairs are the following: GBP/USD, EUR/USD, USD/CHF, USD/JPY, AUD/USD, USD/CAD, and NZD/USD.

Currency Exchange Transactions

The U.S. dollar is also being tied up to all currencies when it comes to currency exchange transactions. Research shows that almost 90% of transactions involve the greenback. The statistics prove that the dollar remains to dominate the market.

This is the reason why almost all countries are concerned whether the U.S. dollar is high or low (or strong / weak) in a particular day.

Reserve of U.S. Dollars

As mentioned before, countries wanting to purchase a number of commodities need to convert their currency to the U.S. dollar. This then leads countries to keep a reserve of the U.S. dollar which they can immediately withdraw when needed.

The most common countries that are heavily importing commodities are China, Japan and Australia. These countries are keeping huge dollar reserves to be able to do oil importation straightaway. To note, China has a reserve of a total of 3 trillion U.S. dollars in its central bank.

Conclusion

The dollar comprise of almost 64 percent of all recognized central banks for currency exchange purposes. Even if the dollar does not hold an official global title it is accepted to be the de facto global currency. Indeed, in the currency exchange market, the dollar rules and it validates the reason why the dollar is the most powerful currency in the world.


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  • Reserve currency
  • currency market
  • US dollar
  • currency pairs
  • commodities
  • importation
  • gold standard