In our last lesson we had a review of the basics of fundamental analysis which we have learned up to this point with a 10 question quiz on monetary policy, trade and capital flows, and the US Economy. In today's lesson we are going to begin our discussion on the fundamentals of the main currencies of the world, starting with an overview of the US Dollar.

As we discussed briefly in our lesson on the main currencies of the world in module 1 of this course, although there is lots of news lately about the US Dollar losing some of its status, as of this lesson there is no doubt that the US Dollar is still the king of the currency world. There are several primary reasons for this which we will cover in today’s lesson, and which are behind the fact that no matter what currency a trader trades, pretty much everyone in the forex market follows the US Dollar.

The first reason why the US Dollar is the king of the currency world is the fact that it is a part of each of the world’s most actively traded currency pairs. According to the Bank of International Settlements and as outlined here, these currency pairs account for 67% of the daily turnover in the forex market. When you add the US Dollar Swidish Krona currency pair and all of the currencies categorized as “other” traded against the US Dollar, that total rises to 89%

EUR/USD 27%
USD/JPY 13%
USD/GBP 12%
USD/AUD 6%
USD/CHF 5%
USD/CAD 4%
USD/SEK 2%
USD/Other 19%

A second reason why the US Dollar is still the king of the currency world is because it is the world’s primary reserve currency, accounting 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. Countries do this so they can purchase goods which are priced in the reserve currency at a cheaper rate than if they had to convert, and to borrow money at a cheaper rate, since lenders will be more likely to lend knowing they hold large quantities of what is considered a more credible currency. Perhaps most importantly for traders, many countries and especially countries in Asia (the most talked about example being china) maintain large reserves of US Dollars so they can either peg the value of their currency to the US Dollar, or maintain a loose peg. The goal here is to 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 examine further in our next lesson.

Thirdly, many private businesses and individuals located outside the United States hold US Dollars for trade reasons, because they consider the currency more stable than their home country’s currency, or for a multitude of other reasons. This, combined with what we just covered on the US Dollar being the world’s primary reserve currency, means that over 2/3rds of all US Dollars in circulation are held outside of the United States.
The last major reason why the US Dollar is still king of the currency world is because many major commodities such as oil, gold, and silver are priced in US Dollars, making access to US Dollars essential for anyone in the world who wants to purchase these products.

More than simple interesting facts, these factors can have huge affects on the value of the US Dollar, and are therefore extremely important to us as traders. Exactly how these things affect the US Dollar, and therefore exactly what we should watch out for as traders will be the topic of our next lesson so I hope to see you then.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

i would never expect that the share of usd trading could be as high as 89% ....

btw, what a great business idea invented by the usa!!! import of commodities + goods + services from all over the world vs. export of more and more worthless dollar bills ... damned hell, why couldn't this idea be invented by myself???

greetings from munich :-),
j.

hey Jaro,

I thought you were going to like this one;-)

While still king of the currency world there is one currency now which is not yet rivaling but has the potential too. Alan Greenspan has even been quoted as saying there is a very real possibility that the EURO could replace the US Dollar as the world's reserve currency. If and how fast that happens has a lot of affect on trading so something we will definitely be discussing in more detail.

Best Regards,
Dave

euro, rubel, yuan, gulf-dollar, usd, ... ???

why not gold, silver, oil ... or something else of real value? or at least something backed up by real value :-))

btw, did s.o. knew mogambo's currency-relativity-theory???

The Mogambo Theory of Currency Relativity: "I bring this up because the Nobel Prize for economics is coming out this week, and I sure could use the huge wad of cash that comes with the Prize, and I finally deserve it this year, as I have just neatly connected Einstein's Relativity with money!" … For one thing, it's a matter of Einstein's relativity; two entities are in relation to each other, so that one currency appears to be moving ahead and one appears to be falling behind, but the reality is they are both falling, falling, falling in purchasing power and they are saying in their little currency voices, "Oooh! Help us! We're faaaaalllliiiiing!" (mogambo guru @The Daily Reckoning, october 2007) ... currencies don't float they just decline at different rates )

source: Mogambo Guru)

bye,
j.

Ahhh a fan of the Daily Reckoning I see. I had the pleasure of meeting their editor Addison Wiggin at their offices in Baltimore and worked with Kevin Kerr for a little while a few years ago. Interesting cast of characters they have there.

I have read a fair amount on the arguments against a fiat currency but I have to say that I don't think I have ever seen that side of the argument summed up quite so eloquently:

"currencies don't float the just decline at different rates"

Have a good weekend.

Best Regards,
Dave

yep,

mogambo guru for president ... and the gold standard for the earthlings :-)

j.

Well, I figured I'd weigh in with this one, because I commented over at YouTube on this one; and it's a topic that's near and dear to my heart. I was on an Airline (Flying out to Lake Tahoe last September, I won't mention the airline) - that told me they wouldn't accept USD on the flight for beverages. Only VISA or Mastercard. I threw a fit and fell in it.

The world doesn't switch to something else as far as a dominant currency. Generally - the world just sinks with it. Thus, this recession is worldwide (as can be seen in the food shortages occuring worldwide, and downturn in many nations economy following the U.S.) You have currencies such as the Euro that have done well. But as Dave said, as of todays date - there's no doubt that the USD is still the king. Why?

Let's take recent USD action out of the picture, for something Dave mentioned. Let's back up 1 1/2 years or so. You had an extra 13k sitting around, and wanted to open up a Swiss Bank account (Something I recommend even today) in 2006.

Do you know what currency was recommended by a introducing broker to a Swiss Bank, to keep your money in?

United States Dollars.

So what does this mean? There is GARGANTUAN interest by the worlds wealthy in keeping the USD the dominant currency. Heck, look at the Airbus situation. If anything, the strong Euro killed Airbus. (As Dave mentioned in the video, 2/3rds is held OUTSIDE the United States).

The United States Dollar is king, and in my humble opinion - will remain king. It would simply cost wayyyyy too much for the worlds wealthy to switch to the Euro now. They would literally lose trillions and trillions of dollars. The worlds economy is much, much too large, to realistically switch to a hard currency.

hi airelon,

very interesting views on usd + economy in general and not very different from my own perspective :-)

... yes, from today's perspective it is very difficult to visualize a world without usd as the main currency. nevertheless, my imagination has no problems to see a world without usd as the ONE AND ONLY currency for state's reserves + commodities. simply because i'm asking myself why should the german/japanese/chinese manufacturers + australian/arabic/russian commodity producers + indian service providers + brasilian fotomodels (BBC NEWS | Business | Supermodel 'rejects dollar pay') ACCEPT USD$ FOR EVER in exchange for their efforts? what if they discover that the usd is 'produced' out of thin air and that there ist no real value behind the paper bill? or even that they figure out that the usd will fall to its internal value (that is zero) as all paper currencies in the (freaking) history of mankind did?

btw, euro or rubel or yuan or any other fiat currency is IMHO no alternative to usd, because the world not just sinks with usd but as well with euros (thanks to ECB and the moronic european governments which also like the printig press like 'your' FED does)

"The worlds economy is much, much too large, to realistically switch to a hard currency." REALLY??? i do not agree with this issue ;-). i believe that this is only a question of price for the future hard currency, isn't it?

could 1 oz gold @ 10,000 usd (when usd still alive :-)) and 1 oz silver @ 200 usd fix that quantity problem? the gold standard served well for thousands of years, so maybe it will sometimes again ....

greetings from munich,
j.

Some recommend simply legalizing a gold-backed currency and letting it compete in the marketplace. I can't see any rational argument against this... My guess is the rate at which it spread would surprise everyone.

I've no idea what the USD will wind up doing given its global interest. It does appear a matter of record that fiat currencies fail, but I'm not sure a fiat currency has ever had the global interest the USD does. Regardless of the current state of USD has "king", I'm not comfortable with the idea that status couldn't change super-quick. I've read that the value of USD could plummet in a "sell off" in just the same way an issue might in the stock market. All these countries are holding it, but if one of them says "That's it, we're moving on" and begins to get out of the USD it's value will begin plummeting and the rest of the holders will start selling as well and... bam. So, I'd like to hear an argument against that scenario, as it is pretty frightening.

Appreciate the videos on fundamental analysis, btw! :-)

hi 'unregistered',

i hope i will accumulate enough gold/silver/oil/wheat/rice/milk/suggar/coffee/.... + a house to live in by time when that scenario becomes true. why? IMHO a collapse of USD whould also mean a collapse of today's financial markets with all these bonds, derivates, bank accounts, ... AND the beginning of a new (solid!) financial system :-)

bye,
j.