The most important financial data point in the world is the value of the US dollar. The world runs on US dollars. The US dollar is the life blood of the global economy. Here are a few statistics about the dollar.
The US dollar is the world’s predominate reserve currency. That means that other nations hold dollars in reserve, much like the US used to hold gold in reserve, in order to back the value of their own currency. About 64 percent of foreign currency reserves held at global central banks are US dollars. In comparison, about 20 percent of foreign currency reserves are held in Euros.
A majority of global trade is priced and invoiced in US dollars. That means, for example, that when an Australian oil refiner buys a cargo of crude oil from a Singapore based oil trader the price that oil is quoted in US dollars, and in order to make payment the Australian company must first convert their Australian dollars into US dollars.
More than 85 percent of global foreign exchange trading involves US dollars.
About 40 percent of debt issued globally is denominated in US dollars. Both nations and corporations issue debt in US dollars. This is especially true of emerging market economies. Global investors want principal and interest payments to be made in US dollars, not, for example, Venezuelan bolivars. Inflation is currently running at over 40,000 percent percent annually in Venezuela.
Changes in the value of the dollar verses other currencies has significant economic and financial implications. Exchange rates tell a lot about the relative strength of global economies.
Interest rates play a large role in foreign exchange rates. Money flows globally to the highest yields. Interest rates in the US are currently higher than rates in most developed economies, and the US Federal Reserve continues to project increases in short-term US rates. The US economy is currently performing better than the economies of Euro, Japan, and as suggested by the recent plunge in the value of the Chinese currency, China. The US dollar has strengthened over the last several months verses a basket of global currencies.
Currency values are a very big part of the current tariff and trade disputes. For example, as the US has recently imposed tariffs on some Chinese goods, making those products more expensive to US consumers, and potentially impacting the volume of goods sold and the profitability of the Chinese companies producing those goods, the Chinese currency has fallen in value. The fall in its value is offsetting some of the price impact of the tariffs. This is because when the value of a foreign currency falls, it takes fewer US dollars to purchase the same amount of goods.
It is disputable where or not the fall in the value of the Chinese currency has been engineered by the Chinese government, or if its plunge in value reflects larger economic issues in China.
In conclusion, it is nearly impossible for a nation to have a strong economy and a weak currency. When an economy grows interest rates rise as the velocity of money and inflationary pressures increase. When interest rates in one nation rise at a faster pace than other nations the value of that nation’s currency will rise. The exception to these market-based rules are the anti-market policies used by some nations to manipulate their currency. An example is capital controls which try to limit or control the free flow of money. However, in the end, a nation’s status is always symbolized by its currency.
Here is a historical timeline of the world’s dominant currencies. From the 1st century BC to 4th century the dominate currency was the aureus issued by Rome. From the 4th through 12th century the dominate currency was the solidus also issued by the Roman Empire under Constantine. From the 13th through 15th centuries the dominate currency was the fiorino or florin issued by Florence. During the 17th and 18th centuries it was the gulden of the Netherlands. In the 18th and 19th centuries it was the real de a ocho (pieces of eight) or Spanish dollar. In the 19th and 20th centuries the British pound. And currently the US dollar is the world’s reserve currency, and most important price in the world.