What is USD (US Dollar) in Forex?
Quick Answer: USD is the world's foremost reserve currency involved in 88% of forex transactions, with Federal Reserve policy influencing global markets and capital flows.
Understanding USD (US Dollar) in Forex
USD (United States Dollar) is the world's foremost reserve currency and the most dominant force in forex markets. Over 88% of all forex transactions involve the US dollar, making it the cornerstone of the global financial system. The Federal Reserve's monetary policy has worldwide implications, influencing global capital flows, commodity prices, and emerging market stability. The USD functions as both a safe-haven asset during crises and a risk-on currency during growth periods, depending on context.
The Dollar's Central Role
Most commodities including crude oil, gold, and agricultural products are priced in USD, creating structural demand. International trade settlement often occurs in dollars regardless of the countries involved. Central banks worldwide hold significant USD reserves, typically 55-60% of global foreign exchange reserves. This dominance means Fed policy decisions—especially interest rate changes and quantitative easing programs—ripple through every corner of the forex market, making FOMC meetings among the most impactful events for all currency pairs.
USD Influence Example
The Fed raises rates by 25 basis points while ECB holds steady. EUR/USD immediately falls 80 pips as the widening rate differential favors USD. Simultaneously, USD/JPY rallies 60 pips, AUD/USD drops 50 pips, and even gold falls $20/oz—all driven by a single Fed decision affecting dollar demand globally.
Major USD Pairs and Drivers
The six major USD pairs (EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, USD/CHF) constitute the vast majority of forex trading volume. US economic data including Non-Farm Payrolls, CPI inflation, GDP, and retail sales significantly impact the dollar. Geopolitical developments, US fiscal policy, Treasury yields, and equity market performance all influence USD strength. The dollar index (DXY) measures USD against a basket of currencies, providing a broad measure of dollar strength.
The Dollar Smile Theory
The USD strengthens in two scenarios: during crises (safe-haven flows) and during strong US growth (capital attraction). It weakens during global recovery when investors seek higher returns elsewhere. Understanding this dynamic helps position trades appropriately across the economic cycle.
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