Uniqueness of US Dollar

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Uniqueness of US Dollar

The unique position of the US dollar as the world’s reserve currency can not be ignored. This dollar status allows the US to effectively export inflation, while the US also enjoys a lower interest rate on its debt. It freed the US from some consequences of its own decisions and allowed the country to effectively “release” some of its responsibilities.

As other currencies become more popular as an alternative reserve currency, there is a risk of inflation and higher interest rates in the US, as well as weaker dollar demand.

The US dollar also holds an important position in many other financial instruments. While cross-border trade can be denominated in any of the most comfortable currencies, but some global markets remain based on the dollar, including gold, oil and many other commodities. The size of the US financial market also plays a role. While stock markets, options, commodities and other bonds outside the US are growing; size, liquidity, convenience and transparency of the US market make it attractive to global traders and increase the role of dollars in financial transactions.

Currency movements are very difficult to predict, and most models rarely work for the short term. While the economic-based model is rarely useful for short-term traders as economic conditions do shape long-term trends.

The value of the dollar will be determined by the health of the country’s economy and its government’s ability to overcome a persistent deficit and increasing national debt. Investors, speculators and traders should realize that the significance of the dollar’s uniqueness separates it from its intrinsic value and that the perceptions of dollar hegemony will affect value besides economic considerations.

Historically, in the early emergence of the euro currency, the European community hopes the euro currency can beat the hegemony of the US dollar. But the debt crisis that hit Europe, especially the euro zone in 2008-2011, pushed the US dollar back to have a superior position as a reserve currency and safe haven.

So is China with yuan currency trying to become a major player in forex trading but still not succeed. Looks like we will keep seeing the hegemony of the dollar in a longer time.

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