The US Dollar (USD) stands as an unparalleled force in global economics. As the official currency of the United States, it not only underpins the world's largest economy but also serves as the 'de facto' currency in numerous other countries. This widespread acceptance underscores its formidable role in international trade and finance. The USD is the most heavily traded currency globally, accounting for over 88% of all foreign exchange turnover, with average daily transactions reaching a staggering $6.6 trillion, according to 2022 data.
The shift in global financial dynamics was marked by the USD taking over from the British Pound as the world’s reserve currency following World War II. Today, the Federal Reserve (Fed), the central bank of the United States, plays a crucial role in shaping the value of the USD through its monetary policy. The Fed's dual mandate focuses on achieving price stability and fostering full employment, primarily through adjusting interest rates.
The Federal Reserve also has at its disposal the ability to print more Dollars and implement quantitative easing (QE) during extreme situations. Quantitative easing typically results in a weaker US Dollar. This strategy was notably employed during the Great Financial Crisis of 2008 to combat the credit crunch. QE involves printing more Dollars and buying US government bonds from financial institutions.
Meanwhile, the monetary policy landscape is also shaped by decisions made by institutions like the Bank of Canada (BoC). Last year, the BoC reduced its interest rates by 175 basis points to 3.25%. It is expected to make another cut of 25 basis points next week, bringing the rate to 3%. This contrasts with the Fed's current approach; it is almost certain to keep interest rates unchanged within the range of 4.25% to 4.50%, as indicated by the CME FedWatch tool.
The unwavering strength of the US Dollar remains a key talking point for economic analysts and policymakers worldwide. Its dominance, facilitated largely by monetary policy, is a testament to its enduring influence on both domestic and global scales.
"Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens,” Trump said.
This sentiment echoes a broader strategy where economic policies including tariffs and currency manipulation are used as tools for national economic growth.