Things You Might Like To Know About The Dollar Before You Start Trading Forex. A useful guide to one of the major world currencies. So before you start to trade USD – know what it is you are choosing to buy, sell or hold.
The US dollar remains the world’s foremost reserve currency. That means it’s the currency most held by other countries rather than being converted into their own currency. Holding large dollar reserves allows those countries to purchase foreign goods without paying the transaction fees involved in converting their own currency into dollars.
By choosing not to buy back their own currencies on forex markets, countries holding dollars also make their currencies cheaper and improve their exports.
On the other hand, the constant demand for dollars as a reserve currency has allowed the United States to run up large trade deficits without being punished by a weaker currency in the same way that other currencies would suffer.
The dollar is also the standard unit of currency for many commodities traded internationally such as gold and oil.
The relative strength of the dollar is indicated by the US dollar index: the larger the index figure, the stronger the dollar. Over the last two decades, the US dollar index has fallen consistently — a response to consistent budget deficits.
The main body used to control the supply of money in the United States — and therefore a major influence on the price of the dollar — is the Federal Reserve. The “Fed” has three tools that can affect the price of the dollar: open-market operations, the discount rate and reserve requirements.
Open-market operations refer to the actions the Fed takes on forex markets (such as buying or selling dollars); the discount rate measures how much of a value is interest and how much is capital; and reserve requirements refer to the amount of money banks must hold against their deposits.
Although each of those tools gives the Fed some control over the dollar, the international nature of the forex markets means that that control will always be limited.
When you start trading forex, it’s likely that you’ll be using the dollar a lot. But you don’t have to. There are plenty of other major currencies that you could specialize in…
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