While there are thought to be more than 170 standalone currencies dotted across the globe, just a select few comprise the world’s major currency pairings.
The US dollar (USD) is by far and away the most dominant international currency, with the greenback on one side of approximately 88% of all forex trades.
But why is the USD considered to be the world’s currency, and what are the benefits of investing in this asset?
Why is the Dollar Known as the World’s Currency?
In addition to featuring in nearly 90% of all daily forex trades, the greenback makes up more than 60% of all known central bank foreign exchange reserves.
All told, there was approximately $19.9 trillion-worth of USD dotted across the globe in May 2021, with the US widely established as the world’s dominant reserve currency.
Because of this, the USD is revered as the world’s single most popular reserve currency, with the next closest (the Euro) comprising just 20% of known central bank foreign currency reserves.
These factors combine to highlight the dominance of the USD in the global forex market, as does the amount of the world’s debt issued in the greenback. In fact, nearly 40% of the world’s debt is issued in dollars, so even on a fundamental level, overseas banks require large volumes of USD to conduct their business.
Interestingly, the great financial crash of 2008 made the USD even more widely used, and by 2018, the central banks of Germany, France and Great Britain held more liabilities denominated in dollars than their own native currencies (the Euro and the GBP respectively).
These factors have all contributed to the USD’s reputation as the world’s leading currency, while also augmenting its historical performance as a peg for major currencies under the Bretton Wood System (many countries still peg their own currency to the dollar even though this monetary system has been abandoned).
Why Should You Trade the USD?
The USD is also dominant from the perspective of investors, with the greenback a central focal point of all forex trading strategies.
But why exactly should you trade the dollar? Here are a few advantages associated with this practice.
- Inflated Liquidity: The USD is the single most liquid currency in the world, thanks to the ease with which it can be bought, sold and traded in real-time. In fact, the EUR/USD pairing boasts an incredibly high level of liquidity, while accounting for approximately 24% of the world’s daily forex trading volumes.
- Optimal Level of Volatility: The USD is viewed as a ‘hard’ currency, which means that it’s unlikely to fluctuate in value over time. This affords traders some stability while trading, while enabling them to take advantage of currency price fluctuations and accessing optimal volatility
- There’s Lots of USD Data: As one of the biggest and most followed currencies in the world, there’s a significant amount of historical and real-time data pertaining to the dollar. This allows for more informed decision making and better technical analysis over time.