How the USD Affects the Forex Market

Importance of the USD

The USD plays a major role in the economies of many countries because it is recognized as the reserve currency. Moreover, the US is the largest importer of goods and second to China when it comes to exports. According to reports, the USD is involved in approximately 75%-85% of all trading activity, which is further proof of its importance, and the US as a whole, in the activities of many other countries.

This also extends to the lending policies of countries around the world, which also support the USD. The international debt of many countries is now largely denominated in USD, which is primarily due to the establishment of institutions such as the International Monetary Fund (IMF) and the World Bank. This means that many countries that conduct trade on the global market and seek financial assistance often receive it in the internationally recognized reserve currency, which is the USD. As such, the repayment of said funds will also have to be in the same currency. 

When it comes to the forex market, the USD, EUR and major currency pairs that have a good track record are lauded by many, in addition to being recognized as safe-haven currencies. In light of this, one can conclude that the USD is a largely revered currency that has risen to the top of the food chain, having managed to build trust, credibility and establish relations with various countries.

Despite its influence and reach, the USD is surprisingly not the strongest currency in the world, as that is a position occupied by the Kuwaiti Dinar (KWD), with the USD coming in ninth as at October 2021. However, this does not take away from the role of the USD in the trading of currencies, stocks and various other commodities.

Role of USD on the forex market

Simply put, forex trading is the buying and selling of currencies on the global market, with the aim of capitalizing on the exchange rate differences. It is fast becoming an investment and income-generating opportunity that people around the world are exploring, particularly following the unprecedented global conditions of 2020 and the subsequent impact on employment and people’s financial stability.

Understanding that forex and currency fluctuations are heavily influenced by international trade, politics and economic conditions, these are factors that all traders need to remain informed on and ensure that they get real-time updates on to guide their trading decisions. 

That being said, when traders demand a higher price for the USD, its value increases. This generally happens when other countries are viewed as risky, which is why the political and economic conditions of a country are key. Moreover, the value of the USD also increases when interest rates rise in the country, meaning that those who have invested in the dollar stand to profit from the higher rates as they will be able to charge more for dollars when trading them on the forex market. This is a concept that avid travelers should also be familiar with – the best time to exchange one currency for another – except that with forex trading, one stands to profit from being able to identify the most lucrative entry and exit points. 

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