Commodities Pricing and the U.S. Dollar.

The U.S. dollar also plays a crucial role in global commodities markets, as many commodities, such as oil and gold, are priced in dollars.

This pricing mechanism simplifies international trade by providing a common benchmark.

This also reduces the need for multiple currency conversions.

It also underscores the close relationship between the dollar’s value and commodity prices.

Fluctuations in the currency’s strength often impact the cost of raw materials and finished goods.

The U.S. Dollar’s Impact on Global Trade and Finance

The dollar’s global role has significant implications for international trade and finance.

Most currencies are only used within their own country or in cross-border transactions that directly involve the currency’s issuer.

However, the dollar is widely used for funding, pricing, trade invoicing and settlement, and cross-border borrowing and loans even when the U.S. is NOT involved!

Its use as a medium of exchange for cross-border transactions reduces currency risk.

It also facilitates the flow of goods and services between countries.

Additionally, the dollar’s prominence in global finance makes it a key funding currency for governments, businesses, and individuals seeking to access international capital markets.

About half of the international trade is invoiced in dollars, and about half of all international loans and global debt securities are denominated in dollars.

As a “safe haven” currency, the dollar is the preferred currency for investors during major economic crises.

For example, during the global financial crisis (GFC) of 2008-2009 and the economic chaos caused by the COVID-19 pandemic in 2020, investors rushed to buy U.S. dollars (“dash for cash”) because they thought the dollar would keep its value.

This is where the dollar’s real power comes from.

It’s not from how much foreign countries hold or use it for trade, but from its role as THE go-to currency for international debt and as a safe haven for investors in times of trouble.

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