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World Reserve Currency

by on Nov 18, 2013

  • 129 views

http://www.theforexnittygritty.com/forex/world-reserve-currency ...

http://www.theforexnittygritty.com/forex/world-reserve-currency

World Reserve Currency

Most Forex traders view the US dollar as a safe haven currency. After all, the USD accounts for nearly two thirds of foreign currency reserves held by the central banks of the world. The Euro holds second place with just under a fourth of all currency reserves. There are a number of advantages to the USA of having what amounts to the world reserve currency. Virtually all commodities are denominated in US dollars. The USD is part of eighty-five percent of all Forex trades. Many foreign contracts are written in US dollars even though the USD is not the home currency of either party. And, when the United States wants to borrow money to finance its ever-growing debt, everyone still is willing to purchase United States Treasuries with their currency. There is no risk in the short term that this situation will change because of the fact that the US economy is far and away the largest in the world. However, there are a couple of concerns regarding the status of the dollar as the world reserve currency. These are the risk of debt default due to a malfunctioning political system in the USA and continuing long term devaluation of the USD.

Risk Hedging versus Speculation

Foreign currency trading serves two purposes. First and foremost the Forex market exists to facilitate international trade and the movement of wealth. Companies that do business in the international arena and people who earn their money in unstable regions of the world prefer a stable currency for doing business and storing wealth. The second purpose is speculation. Currency speculators do not especially care for stable currencies. Rather they would prefer that the USD is going up or down but not standing still. The status of the USD as the world reserve currency affects its use in international trade and it especially affects the use of the USD as a safe haven currency.

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