How Did the Dollar Become the "Dominant Currency"?

While the factors driving the dollar's rise remain intact, the market generally believes that many of the positive factors have already been priced in, and with a crowded short position on the dollar, its future movement remains uncertain. The policies of the Trump administration have been a key driving force behind the dollar's sustained appreciation. First, the U.S. tariff policy, which does not require congressional approval and can be directly implemented by presidential executive orders, has played a significant role.

Trump's decision to impose high tariffs on goods from countries such as China, Mexico, and Canada, along with protectionist trade measures, may lead U.S. trading partners to devalue their currencies in order to maintain export competitiveness, indirectly strengthening the dollar. Secondly, tax cuts, immigration policies, and stock market stimulus measures by the Trump administration could further boost U.S. economic growth and enhance the dollars appeal. However, these policies may also introduce instability into the U.S. economy, potentially affecting the long-term trajectory of the dollar.

The dollar's strength is not only pressuring other currencies but also increasing the uncertainty in global capital flows. Some emerging market currencies, especially those closely tied to the dollar such as the Mexican peso and Turkish lira, are facing significant depreciation pressure. Meanwhile, the strong dollar may exacerbate global trade imbalances, forcing other countries' central banks to take more intervention measures to cope with currency fluctuations.

Why is the U.S. Dollar the Foundation of the Forex Market?

The U.S. dollar's role as the core currency in the forex market stems from its dominance as the global reserve currency. Since World War II, the dollar gradually became the world's reserve currency through its link to gold.

Although the U.S. left the gold standard in 1971, the dollar has remained the primary currency in global foreign exchange reserves, playing a significant role in international transactions and investments. According to data from the International Monetary Fund (IMF), the dollar currently makes up more than 60% of global foreign exchange reserves and serves as the standard currency for global settlement, particularly in commodity transactions such as oil and gold.

Moreover, the size of the U.S. economy and the depth and liquidity of its financial markets have helped maintain the dollar's dominant position in the global forex market. The global influence of the U.S. economy and its innovation capabilities have made the dollar irreplaceable in global trade.

Additionally, U.S. financial markets, including its bond, stock, and foreign exchange markets, attract global investors due to their high liquidity and scale, further driving the widespread use of the dollar. The Federal Reserve's monetary policy also has a significant impact on global markets, especially in areas like interest rates, capital flows, and financial market stability.

Therefore, the dollar's central role in the global payment system makes it the foundation of the forex market.