The US Dollar

 see also:   Currency  , foreign currency trading

In 1995, over US $380 billion were in circulation, two-thirds of which was outside the United States. By 2005, that figure had doubled to nearly $760 billion, with an estimated half to two-thirds being held overseas, representing an annual growth rate of about 7.6%. However, as of December 2006, the dollar was surpassed by the euro in terms of combined value of cash in circulation. The value of euro notes in circulation had risen to more than €610 billion, equivalent to US$802 billion at the exchange rates at the time.

Measuring the strength /weakness of the dollar:

Hos strong is the dollar vs. a "basket" of currencies?  See actual quotes  .DXY  (see link here)

see our discussion on Weak US dollar and Strong US dollar

International use

Comparison of worldwide use of the U.S. dollar and the euro

The dollar is also used as the standard unit of currency in international markets for commodities such as gold and petroleum  (the latter sometimes called petrocurrency). Even foreign companies with little direct presence in the United States, such as the European company Airbus, list and sell their products in dollars, although some argue this is attributed to the aerospace market being dominated by American companies.  At the present time, the U.S. dollar remains the world's foremost reserve currency, primarily held in $100 denominations. The majority of U.S. notes are actually held outside the United States, known as eurodollars (not to be confused with the euro) regardless of the location.

for more, see Wikipedia

Dollarization and fixed exchange rates

Other nations besides the United States use the U.S. dollar as their official currency, a process known as official dollarization. For instance, Panama has been using the dollar alongside the Panamanian balboa as the legal tender since 1904 with a rate of change of 1:1. Ecuador (2000), El Salvador (2001), and East Timor (2000) all adopted the currency independently. The former members of the U.S.-administered Trust Territory of the Pacific Islands, which included Palau, the Federated States of Micronesia, and the Marshall Islands, chose not to issue their own currency after becoming independent, having all used the U.S. dollar since 1944. Two British dependencies also use the U.S. dollar: the British Virgin Islands (1959) and Turks and Caicos Islands (1973)

Some other countries link their currency to U.S. dollar at a fixed exchange rate. The local currencies of Bermuda and the Bahamas can be freely exchanged at a 1:1 ratio for USD. Argentina used a fixed 1:1 exchange rate (Currency) between the Argentine peso and the U.S. dollar from 1991 until 2002. The currencies of  Barbados and Belize are similarly convertible at an approximate 2:1 ratio. In Lebanon, one dollar is equal to 1500  Lebanese pound, and is used inter­changeably with local currency as de facto legal tender. The exchange rate between the Hong Kong dollar and the United States dollar has also been linked since 1983 at HK$7.8/USD, and pataca of Macau, pegged to Hong Kong dollar at MOP1.03/HKD, indirectly linked to the U.S. dollar at roughly MOP8/USD. Several oil-producing Gulf Arab countries, including Saudi Arabia, peg their currencies to the dollar, since the dollar is the currency used in the international oil trade.

The renminbi used by the People's Republic of China was informally and controversially pegged to the dollar in the mid-1990s at ¥8.28/USD. Likewise, Malaysia pegged its ringgit at RM3.8/USD in 1997. On July 21, 2005 both countries removed their pegs and adopted managed floats against a basket of currencies. Kuwait did likewise on May 20, 2007, and Syria did likewise in July 2007.

Belarus, on the other hand, will tie its currency, the Belarusian ruble, with the U.S. dollar in 2008. In some countries, such as Peru, although USD is not officially regarded as a legal tender, it is commonly accepted. In Mexico's border area and major touristical zones, it is accepted as if it was a second legal currency. In Cambodia, the USD circulates freely, or even preferred over the Cambodian riel. Amounts of one dollar or more are given in dollars, while the riel serves as a subunit.

More about the Dollar

The dollar's value refers to the purchasing power of the dollar versus other currencies, or the exchange rate between the two currencies. When the dollar is strong, foreign goods are relatively less expensive.

This can benefit businesses that import raw materials or manufactured goods into the United states, such as Wal-Mart. A weakening dollar benefits companies with foreign competitors, such as Ford, as their competitors' goods become more expensive. A weakening dollar can also lead to rising interest rates, as investors require higher rates to compensate for the added Currency risk. Higher interest rates, in turn, have significant consequences for the housing market and business investment in general. A strong dollar means lower oil prices, as the US purchase much of its oil abroad. As the dollar weakens oil producers charge more to protect their margins.

Factors affecting the dollar

Trade Deficit

A trade deficit occurs when a country imports more than it exports. This leads to a net outflow of a country's currency. Countries on the other side of the transaction will typically sell the importing country's currency on the open market. As supply of the country's currency increases in the global market the currency depreciates. As a net importer, the US has seen its trade deficit grow rapidly over the last decade. In 2006 the US had a record deficit of 765 billion dollars.

Budget Deficit

When a country's government spends more than it earns from taxes or other sources of revenues, it is forced to borrow from its citizens and/or from foreign entities. As a country's debt load increases, the value of its currency may decrease as result of fears within the international community over its ability to repay the debt. Currently, the US is the world's largest debtor with approximately 9 trillion dollars in debt held by the public (includes intergovernmental and debt owed by States, corporations and individuals). Over half of the debt held by the public is held by foriegners.

A Brief History:

The gold standard was the way in which the international monetary system maintained parities until the 1930’s (with a notable interruption during WWI and the years that followed it). Later, at the end of WWII, more than 40 countries signed on to the Bretton Woods agreement, which established a fixed exchange rate system between most of the major world economies.

The accord stipulated that the undersigned fixed the value of their currencies in relation to the US Dollar (USD), and that the dollar would be convertible to gold at the fixed price of U$35/ozt. The Bretton Woods lasted until 1971, when President Richard Nixon suspended the USD convertibility to gold and unilaterally changed the USD parity with other international currencies. From 1973 to 1999, the USD, the Japanese Yen and the European currencies operated a “dirty float” exchange system, that is to say the currencies were allowed to move in accordance with market forces but the central bank of each country would intervene to move the exchange rate in one or another direction. In general, exchange rates between the European currencies stayed inside a tight band from 1973. For example the German Mark and the French Franc freely floated with respect to the USD, though they stayed within a tight band between each other most of the time by virtue of an agreement known as the European Monetary System.

In January 1999, eleven countries adopted the same currency, the Euro, issued and administered by the European Central Bank (ECB), which floats against the dollar in the same way as the various European currencies did up to 1999. Today, thirteen countries have adopted the Euro, with two more due to join in 2008. After Bretton Woods fell apart, the USD remained the focus of the international monetary system, and evidence to support that abounds. In 2000, more than 70% of international reserves were in USD. However, that proportion has fallen every year, reaching a bit under 65% in 2007. It is the Euro which has gained from the reduction of dollar holdings: Euro assets have gone from a little over 18% of world reserves to nearly 26% in 2007. The British Pound has also gained, to 4.7% of total reserves in 2007.

Links

• foreign currency trading

• The US Dollar
• Currency  
• Eurocurrency  
• currency hedging  
• ADR

Historical exchange rates

• Big Mac Index

Books about FX trading from Amazon.com