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As we briefly discussed in our earlier lesson on the main currencies of the world, although it has been in the news that the (USD) US Dollar is losing some of its status, as of this lesson it is not in question that the US Dollar is still the king of the currency world. There are various primary reasons for this that are behind the fact that, whatever currency a trader trades, pretty much everyone in the forex market follows the (USD) US Dollar.

First of all, one of the main reasons that the US Dollar is the king of the currency world is due to the fact that in the world’s most actively traded currency pairs, it is a part of each of them. The Bank of International Settlements has provided statistics advising that these currency pairs account for 67% of the daily turnover in the forex market. If you include the US Dollar/Swedish Krona currency pair as well as the rest of all of the currencies categorized as “other” traded against the US Dollar, then this total rises to 89%.

Below is a list of the most actively traded currency pairs

USD/Other 19%

Another reason why the US Dollar is still the king of the currency world is due to the fact that it is the world’s primary reserve currency, and accounts for over 63% of the world’s currency reserves. A reserve currency is a currency held by the governments/central banks of other countries in large quantities. The reason that countries do this is so that they can purchase goods which are priced in the reserve currency at a cheaper rate than if they had to convert, and it also allows them to borrow money at a cheaper rate, since lenders are more likely to lend knowing that they hold large quantities of what is considered a more credible currency.

Maybe the most important reason for traders is that, many countries and particularly countries in Asia (the most obvious example being China) maintain large reserves of US Dollars in order to either peg the value of their currency to the US Dollar, or maintain a loose peg. They do this so that they can either stabilize their own currencies and therefore their economies and/or to hold the value of their currencies artificially low in order to make their goods more competitive overseas, something which we will discuss further in a later lesson.

As well as this, a lot of non-US based private businesses and individuals hold US Dollars for trade reasons, because they deem the currency to be a more stable one than that of their home country, or for many other reasons. This, in addition to what we just discussed with regards to the US Dollar being the world’s primary reserve currency, accounts for the fact that over 2/3rds of all US Dollars in circulation are held outside of the United States.

Lastly the US Dollar is still king of the currency world as many major commodities such as oil, gold, and silver are priced in US Dollars, which means that access to US Dollars is crucial for anyone in the world who wants to purchase these products. These factors can have a huge effect on the value of the US Dollar, and are therefore incredibly important to us as traders.

The importance of a particular economic release is something that is changeable as it is dependent on what is happening from a US Dollar fundamentals standpoint. If there are fears that the economy may be going into recession, then the market is going to be more sensitive to any announcements, such as non-farm payrolls and consumer spending, which may provide early warning signs that this is the case. On the other hand, if the economy is growing and the markets are concerned that inflation may become a problem, then the announcements which cause the market to move may be price data releases, such as the CPI and the PPI. In 2007 some analysts considered the most market moving indicators, in order of importance to be:

  • Non Farm Payrolls
  • FOMC Releases
  • Retail Sales
  • ISM Manufacturing
  • Inflation
  • Producer Price Index
  • The Trade Balance
  • Existing Home SalesForeign Purchases of US Treasuries (TIC Data)