Why is the US dollar defined as the undisputed star on the currency markets? Let’s see it together.
It is no coincidence that on the Forex, therefore on the currency market, the US Dollar appears to be the undisputed protagonist.
In this regard, we remind you that Forex is the most liquid market that retail traders have access to, one of the fundamental markets with direct consequences on our lives. Let’s just imagine the fact that a depreciation of our home currency could directly affect the price level, not to mention the impact on companies’ foreign trade.
Forex, in addition to being known for its speculative market value, derived mainly from the marketing of the last 15 years, has always been important and sees many financial instruments that use Forex to hedge the risks deriving from commercial transactions and foreign investments. So let’s see together, even historically, why the US dollar is the undisputed king of Forex.
Historical reasons: Bretton Woods
We open an interesting cultural window regarding the economic and financial history of the last century. Let’s start with the Bretton Woods agreements of 1944, taken in New Hampshire in America. In a very brief summary, the most important Western countries agreed that the exchange rates against the Dollar should not move beyond a 1% fluctuation band, otherwise they would have to be adjusted through specific operations. Furthermore, it was established that the Dollar was linked to gold, in practice it was a gold regime all in favor of the Dollar that could be printed in an "uncontrolled" way by the American central bank, a fact disputed several times over time by other Western economies.
It was precisely this factor that made the most printed and circulated currency its own the US dollar. In practice, the US became very strong in those years thanks to the absorption of inflation by the other countries which were part of the agreements.
Remember for example how, a few years after the Bretton Woods agreements, the Americans instituted the Marshall Plan, an economic aid plan to support the recovery of Europe after the war, one of the largest expansive monetary maneuvers without direct consequences on domestic inflation.
Subsequently, in 1973, a flexible exchange rate system was developed as the US, by printing money without any control, could export inflation at the expense of other global economies. We broke away from the “gold standard” and then negotiated the exchange rates freely. But by now it was too late for other economies, as the US had printed such a large amount of money that the dollar became the standard for the global economy. From then on, everything was quoted in dollars, even the other currencies, those from then on will be defined as "majors".
The birth of Forex
Since Forex is a very liquid market, it must have needed a lot of money to be “launched”, and who better than the US could create such a market? The United States was, after the Bretton Woods agreements, the masters of liquidity globally. They printed in such a large amount that a domestic problem in the US could have repercussions in Europe, even if it had no effective direct links. Just think of the oil crisis in the 70s, a US phenomenon with global consequences.
The US dollar has always been, since World War II, the undisputed king in the global currency market. When the first Forex trading began, available only to a few traders, the Americans also invented modern leverage mechanisms, those that allow securitization of any credit instrument (as a derivative) and multiply the value of your investments. If now the US financial system is the most powerful and influential in the Western world, it is mainly due to the dynamics that have exploited the momentary weakness of some states in difficulty, to cede economic power in exchange for aid to European countries.
The role of the dollar today
It is no coincidence that in 2022, the dollar is the most valued currency in Forex, while economic areas such as Europe are in total distress. In this difficult time for the European continent, hit by high inflation and a conflict at the gates, the Dollar is destroying currencies such as the euro, pound sterling and the Swiss franc, further fueling inflation in the European continent.
In practice, Europe has effectively become a branch of the US, first with the Bretton Woods agreements, where Europe accepted the US as masters of the world, then accepting the Marshall Plan, a cultural trading operation that has made more dependent on the Americans and their culture totally incompatible with the European one. In this context, the dollar remains the undisputed king of the market, unless China takes over in the next few years as it has been doing for some years now. We’ll see.
Original article published on Money.it Italy 2022-10-27 08:58:00.
Original title: Perché il dollaro è il protagonista del Forex?
