The U.S. Dollar – Key to the Current Financial System
InvestingOnline.com
16/07/2018, 11:59The financial systems as we know it now is the legacy of the Bretton Woods conference. The mid-1900’s saw the world’s financial elite gathering in the United States to shape a new financial order as the Second World War ravaged the world.
As it turned out, the United States proposed the U.S. Dollar to become the world’s reserve currency by promising to convert any U.S. Dollar from other nations in gold. The agreement set a fixed rate between the gold and the U.S. Dollar, making gold as the pillar of the new financial system.
Not all countries agreed with the new status of the U.S. Dollar. In fact, many opposed but were quickly convinced as the world needed capital to rebuild. And the money, as it turned out, was in the United States.
The Nixon Shock – When the U.S. Dollar Become Key to the Current Financial System
1971 brought an abrupt end to the Bretton Woods agreement. The Nixon administration couldn’t fund the trading account deficit anymore, and gold became scarce.
It broke the promise to redeem the dollars for gold, and the world’s nations didn’t understand how the Americans will fund the twin deficit. But the Americans had a plan, and it involved the new “black gold”: oil.
Kissinger convinced Saudi Arabia to sell all its oil in U.S. Dollars. Moreover, to use the excess revenues to buy U.S. denominated debt. More precisely, treasuries, in exchange for military protection in the area.
And so, the petrodollar was born. To this day, it plays a crucial role in the international financial system, as it funds an enormous U.S. deficit.
The U.S. Dollar plays a crucial role in the currency market. It splits the currency pairs into main categories (majors and crosses) and sits at the heart of risk-off and risk-on trades.
Furthermore, a big chunk of the international trade is conducted in U.S. Dollars. If one ads to this the fact that international loans use mostly the U.S. Dollar, then the influence of it becomes obvious.
Conclusion
If there is one currency that sits at the heart of the current financial system, that’s the U.S. Dollar. It makes all news coming out of the United States of crucial importance for the retail Forex trader, as it impacts the Fed’s interest rate decision.
