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Why is the US dollar a powerful currency?

The US dollar is considered as one of the most powerful currencies because of the role it plays in the global economy.

 

Almost all official currencies in the world today are backed by the US dollar. This means that each country or central bank must have in reserve an amount in dollars equal to the total value of their currency that is currently in circulation. With these reserves, countries all over the globe now have a shared interest in the value of the dollar and the factors that may influence it. Prior to World War II, this role was given to gold, but when the economy of the United States started to strengthen and expand on a relatively stable trend, the dollar was chosen.

 

Additionally, the dollar is considered as a standard for many transactions. Besides from their local currency, businesses are likely to accept payments in dollar as well. In fact, a wide range of commodities from metals such as gold and platinum to fuels such as crude oil and natural gas are compared exclusively against the US dollar to determine their value. To purchase any of these, you would need to conduct a trade in dollars or exchange whatever currency you currently hold which increases the presence of dollars in markets around the world. This is also true for bilateral trades between different countries who would sometimes need to first convert their currency into dollars for an agreement to be made.

 

All these lead to the US dollar being the most traded currency in the Forex due to its strong reputation among investors that gives it the highest level of liquidity. Traders often prefer to have dollars because it is viewed as a safe investment that would take a major economic crisis to lose value. As a result, the majority of what are considered major pairs on the Forex are the pairs which include the US dollar.

 

Created by : Viceris
Published : 30 Jun 2014

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