The American dollar plays a very important role in the global economy. It is one of the most widely used currencies in the world. USA is the world superpower in both in financial terms and development terms.
Most currencies form a successful trading pair with the US dollar. Examples of few widely traded pairs are EUR/USD, GBP/USD, and JPY/USD etc. All of them have the American dollar as the counter currency.
The following factors contribute to USD emerging as the most important currency in the world trade.
- Stability
Federal Reserve Bank determines the rate and interest by regulation and controlling the flow of dollar currency in the market. FED is the independent central bank.it is responsible for formulating the monetary policy. Monetary policies are in turn regulated by three factors .The open market operations, maintaining the reserves and controlling the rate of interest imposed on banks and financial institutions make the monetary policy. These tools are so devised so as to maintain the exchange rate of dollar. No other currency has shown such a high degree of stability.
- Dominance of USA on world trade.
America is the largest trading country in the world. The superpower supports the economy and business of several countries with whom trading is done, be it import or export. Thus making USD the most important currency or hard currency of the world. Hence dollar dominates the forex also.
- High GDP of USA
America witnesses high Gross Domestic Product (GDP). The nation’s financial performance is gauged by its GDP.The classical definition of GDP is the measure of all goods and services produced by the people over a specific period of time. USA has the highest GDP in the world at 32.9 in 2008-09. America is basically a service economy. Agriculture contributes only 1% to GDP.High GDP implies high purchasing power of the country and thus high exchange rate. GDP is an instrument used by the federal bank to regulate the exchange rate.
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