Three reasons the US dollar is forex’s biggest currency

So the question that naturally springs to mind is – why?

Why is the US dollar so popular, so widely traded, and so dominant on the forex market?

Here are three important reasons:

First – the global reserve currency

The US dollar is often called the ‘global reserve currency’ because although it is only the official currency of the United States, huge numbers of other countries keep large volumes of USD stored as their official reserve currency. 

This includes bodies like national central banks, like the Bank of England in the UK, the European Central Bank which sets interest rates for the Eurozone, and the Bank of Japan in Tokyo.

This means that there is always massive demand for dollars from many different large economies around the world, which means that USD will always rank highly when the forex trading market is measured by trade volume.

Second – the petrol dollar issue

Oil is one of the most important and widely traded commodities in the world. The cars and planes out your window are proof enough of this. So the currency that oil is sold in after its initial processing is going to get a great deal of attention and trade. So it won’t surprise you to learn that this currency is… the United States dollar.

This means that anyone in any country who wants to buy oil as it is produced will need to have access to large supplies of USD in their accounts. So large numbers of very large businesses always need a ready volume of USD.

Third – relative versus absolute GDP

While it’s true that the United States only represents somewhere between 14-26% of the world’s GDP depending on how it’s calculated, it’s rare for GDP to matter relative to the whole world in an absolute sense.

What’s much more common is for GDP to count as calculated against other countries and economic areas. When measured on that scale, the US consistently ranks as in the top three global economies, only ever surpassed by either China or the Eurozone.

The sheer size and scale of the US economy makes the US dollar an attractive place to buy and sell currency. An economy of that size is harder to radically destabilise because too many interests are too invested in it remaining stable and valuable. This is what we would call a compound effect, where the fact that an asset is already valuable is a key reason why it both stays valuable and becomes even more valuable.

Trading US dollars skillfully matters.

Because US dollars are so widely circulated, the ways that they can fluctuate subtly on the currency markets can really matter. USD gets traded in vast quantities for every other currency in the world. From the big names like Japanese Yen or JPY all the way down to the more niche cases like Czech Krona or CZK and Thai Baht or THB.

So when you are handling currency trade in USD, you need to be confident you are dealing with experts who fully understand the depth and detail of what they’re doing. You also want someone who talks to you personally, and treats your money like it’s yours – not just more currency in the collective forex trading machine. 

You want a real forex specialist. You want help from Halo Financial.

Whether you’re emigrating to the US, studying abroad anywhere from California to Connecticut, or making business payments from Brussels to Boston, we’re here to help you. We work to radically mitigate your exposure to currency risk when you send money abroad. 

Register for a free account with us today to get started with making online money transfers that achieve more.