USA Dollar – Understanding Its Importance
In any business that you decide to venture in, it is very important to have a good understanding of how it works. You should understand carefully the broad market and then dissect it into small units. For instance, if you have a lemonade stand, you should have a good understanding of the supply chain of the lemon. In this, some of the questions you should ask are: where is the lemon grown? How much does it cost to produce the lemon? How long does it take for a lemon tree to grow? Having this type of understanding will help you create a good and profitable business. In the world of trading too, it is very important to have a good understanding of all the parts that make the market. For instance, if you are an oil trader, you should break down the oil into several parts such as the source, transportation, supply, currency, and demand. The dollar is a unique currency following the 1944 Breton Woods agreement. Today, most items are quoted in USA dollar terms.
In this article, the various characteristics of the dollar will be looked at.
#1 – 90%+ of All Currency Trades Involve the Dollar
Today, the dollar is the most important currency worldwide. The dollar is not only the main currency of the United States but it’s also the global benchmark. Most countries measure their economic performance in terms of the dollar strength or weakness. Also, a number of countries such as Zimbabwe use the dollar as their local currency. Also, today, the financial system has gone global with traders in China being able to sell their products globally. The currency used for these transactions is the dollar.
#2 – Inverse Correlation
For traders, correlation is a very important mathematical aspect that should not be overlooked. Correlation shows the relationship between two items. Two items can be perfectly, inversely, or not correlated. The dollar is inversely correlated with a number of items. For instance, the dollar moves in the opposite direction with gold. This is because investors tend to move to gold when there is weakness in the financial market. When the market is strong or resilient, investors will hold gold. This results to an inverse relationship between the two. Also, there is an inverse relationship between the dollar and the US treasuries for the same reasons. On the other hand, the dollar tends to move in the same direction with the US key indices such as S&P and Nasdaq.
#3 – 9/11 Impact on the USA Dollar
Before the September 11 terror attack in the United States, the dollar was considered one of the safest havens by investors. Today, the same sentiment exists among investors. This is because investors looked at the United States as a leading and safe economy. The terror attack was a wakening call to the investors who previously allocated their capital in dollar terms. Today, while the dollar is considered a safe haven, most investors take it with caution. For instance, a major terror attack similar to 911 would lead to a serious decline of the dollar.
#4 – Keep an Eye to the USA Dollar Index
The dollar index is a very important tool that you should always look at as a trader. You can also trade the dollar index because it is provided by a number of brokers. The dollar index is a gauge that measures the weakness or strength of the dollar. It is weighted against the major currencies such as Pound, Euro, and Japanese Yen. Policy makers and investors constantly refer to the dollar index when making decisions. Therefore, no matter what asset you are trading, you should always have a keen look at the dollar index.
#5 – Most Commodities are Quoted in Dollar Terms
Another key characteristic of the dollar is that most commodities are quoted in dollar terms. For instance, the price of crude oil and corn is always quoted in dollar terms. Therefore, the strength of the dollar will lead to significant decline in the commodity. For instance, in 2015 oil had the strongest loss while dollvar had the highest movement. Also, other commodities as evidenced by the Bloomberg Commodities Index had the biggest loss which was attributed in part by the strengthening dollar.