Finance, Forex and Investments

why does the world trading depend on U.S.D. currency & why is U.S.D. taken as base currency?

1)it hinders the trade growth in other country due to its own economic instability. 2)US recession leads to Global recession then why should trade depend on USD?? 3)why doesnt the export import trade use the currency related to the countries involved in import export trade & use USD as trading currency? eg. trade between india & Hongkong shud be in either INR or HKD & not USD as there is unneccesary loss of money in converting USD in Home currency. Please explain?

Public Comments

1. because changing a base currency would take a lot of bullsh*ts of approval from the congress.. and maybe different countries?
2. Very Interesting Question. There had to be some BASE CURRENCY for trading across various nations. Earlier GOLD was the BASE CURRECY. Every transaction was Gold Denominated. The problem of USA is a recent problem. When Base Currency was decided the world did not anticipate such problems with the USA. Secondly, if we switch to different currencies for different nations, there will NOT BE ANY PARITY. Exchange rate will play a spoil sport here. The World needs UNIFORMITY in the Trasactions. U must have heard of the Benchmark Pricing system. This system is used buut different nations negotiate deals at international levels. Many countries participate in such deals. Just imagine how difficult it will be, if each nation quotes a Price in their own Currency. There will be not uniforimity. We will not know who has quoted high or who is quoting low. Hence to over-come these difficulties, we have a BASE CURRENCY SYSTEM, and this base currency at the moment is USD.
3. The world trading doesn't depend on the USD, most countries use it, because the US is the biggest importer of goods in the world. If you send 90% of the plastic garbage you produced for good money to one country, then why not use that currency as base. It's really up to each trader, or manufacturer. Europeans use the Euro and before that used their own currencies and not the USD. Even some oil and gas is traded in Euro. It is all about business and how comfortable the trading partners feel with a currency.
4. Trading is usually taken up to make a profit. this is something that all of us know. When the trade is between two countries then the settlement must be in a currency that is common to both. Lets take your example India to Hongkong. Both the countries may not be comfortable in accepting payment in the others currency. Most importantly if the payment is in a currency that is commonly used across the world it would be even better. Thats one reason why all trade is done either in USD or Euros.. Earlier the USD was the most stable currency and hence all countries took up the USD as the base currency for all trades. nowadays with the value of the $$$ changing so frequently that too so badly people have given up using USD as the base and these days they are using the Euro. Euro is much more stable than the USD now and most of the foreign exchange trades happen in euro's these days. Hope you understood.
5. As bad as the US dollar had done, people, globally, trust the dollar more than any other currency. As oil prices moved up, the Euro did better, but now the dollar is outperforming everything including the Euro with the possible exception of the Japanese yen. Take a look at the currency prices in Forex trading which you can see if you go to www.Barcharts.com and click on 'Forex'. As bad as our economy is performing, the economies of the rest of the world are declining more. Some, like China, may still grow more than ours, but the decline as a percentage is greater. You can see this if you compare FXI to SPY on the stock market.
6. Well there had to be some BASE CURRENCY for trading across various nations. Earlier GOLD was the BASE CURRENCY. Every transaction was Gold Denominated. The problem of USA is a recent problem. When Base Currency was decided the world did not anticipate such problems with the USA. Secondly, if we switch to different currencies for different nations, there will NOT BE ANY PARITY. Exchange rate will play a spoil sport here. The World needs UNIFORMITY in the Transactions. you must have heard of the Benchmark Pricing system. This system is used but different nations negotiate deals at international levels. Many countries participate in such deals. Just imagine how difficult it will be, if each nation quotes a Price in their own Currency. There will be not uniformity. We will not know who has quoted high or who is quoting low. Hence to over-come these difficulties, we have a BASE CURRENCY SYSTEM, and this base currency at the moment is USD.