Currency Fundamentals

Currency – US Dollar (USD) 

The United States boasts the world's largest economy, making its currency, the US dollar (USD) also known as the "greenback," a dominant player in the forex market. Here's why the USD holds such weight:

• Global Powerhouse: The US economy is a major engine driving global markets. The USD's stability and liquidity make it the world's reserve currency, meaning many countries hold it as a safety net.

• The King of Currencies: Due to its strength and liquidity, the USD is often used as a benchmark currency. Many other currency values are quoted in relation to the USD.

Take a look at the table below:

One of the key factors behind the US dollar's dominance is its unparalleled liquidity. Here's what fuels this liquidity:

• Wall Street Might: The US houses the world's largest stock exchange, the New York Stock Exchange (NYSE). With companies listed on the NYSE valued at over $28 trillion (almost 80% of the global market), significant trading activity occurs in USD.

• Bond Market Behemoth: The US bond market is another giant, accounting for roughly $31 trillion of the $82 trillion global bond market value. This translates to a vast pool of USD constantly being traded and exchanged.

• Global Trading Hub: The sheer volume of transactions involving the USD is staggering. During a typical trading session, the USD can account for over 90% of all global currency transactions.

This high level of liquidity makes the USD easily tradable and minimizes the risk of getting stuck with a currency you can't readily buy or sell. This ease of entry and exit is a major advantage for forex traders.

Reserve Currency

The US dollar (USD) extends its influence beyond currency pairs. Here's how:

• Reserve Currency Dominance: Over 63% of the world's currency reserves are held in USD. Central banks around the globe hold USD due to its perceived stability and credibility. This makes the USD the world's leading reserve currency.

• Trade and Borrowing Powerhouse: Countries hold USD reserves for various reasons, including facilitating international trade and borrowing in USD. Having a readily available USD reserve allows for smoother trade transactions and potentially better borrowing rates.

• Currency Pegs and Stability: Some countries peg their own currencies to the USD. This helps them achieve two potential goals:

  • Stability: Pegging their currency to the USD can provide much-needed stability for their own economies.

  • Export Advantage: A weaker currency relative to the USD can make their exports cheaper on the global market, potentially boosting their export competitiveness.

• USD: The Language of Commodities: The USD reigns supreme in the world of commodities. Many major commodities, like gold, oil, and copper, are priced and traded in US dollars. This means that for anyone wanting to buy these commodities internationally, access to USD is essential.

In essence, the USD's role extends far beyond currency pairs. Its status as the leading reserve currency and its dominance in commodity pricing solidify its position as a truly global currency.

Currency Fundamentals

The US dollar's value is heavily influenced by economic data releases. The market's sensitivity to this data depends on the current economic climate:

• Recessionary Jitters: If fears of a US recession loom large, the market becomes hyper-sensitive to economic indicators. Data like non-farm payrolls (employment numbers) and consumer spending figures are scrutinized for signs of a slowing economy, potentially leading to USD fluctuations.

• Inflation Watch: Conversely, during periods of economic growth, inflation concerns take center stage. Price data releases like the Consumer Price Index (CPI) and Producer Price Index (PPI) become market movers. Traders watch these figures to gauge inflationary pressures, which can impact the USD's value.

Understanding this interplay between economic data and the USD's performance is crucial for forex traders. By following key economic indicators and interpreting them in the context of the current economic climate, you can gain valuable insights to inform your trading decisions.

Most Important Economic Indicators to Follow

The economic indicators below are considered by many economists to be the most market moving indicators in regards to the US dollar:

• Non-farm Payrolls (NFP) : Shows the change in the number of employed people during the month reported, not including employment in the farming industry.

• Retail Sales : The total value of sales at the retail level. It is important because it is a good indicator for the level of consumer spending, which accounts for the majority of overall economic activity in the US.

• University of Michigan Consumer Sentiment : A survey conducted on businesses to rate the relative level of current and future economic conditions.

• Consumer Price Index (CPI) : It is the measure of the change in the price of goods and services purchased by consumers, excluding food and energy.

• Gross Domestic Product (GDP) : It gives the annualized change in the inflation-adjusted value of all goods and services produced by the US economy.

• ISM Manufacturing PMI : a survey of purchasing managers in the manufacturing industry, who are asked to rate the relative level of business

• Federal Reserve Policy Announcements : The Federal Open Market Committee (FOMC) issues a statement after each policy meeting. If it is more hawkish than expected, this is usually good for USD.