US Dollar in International Market 2015

TABLE OF CONTENTS

ABSTRACT ......................................................................................................................................... 2

I. INTRODUCTION ........................................................................................................................ 3

1. Background ................................................................................................................................... 3

2. Focus and scope ............................................................................................................................ 3

3. Limitation ...................................................................................................................................... 3

4. Research methodology .................................................................................................................. 3

5. Structure ........................................................................................................................................ 4

II. TECHNICAL SECTIONS .......................................................................................................... 5

1. The brief history of US Dollar ...................................................................................................... 5

2. The importance of USD in International Trade .......................................................................... 5

3. The trend in price of USD from 2005 to 2014 ............................................................................. 8

3.1. US Dollar Index ............................................................................................................................ 8

3.2. USD Index and Gold Price trend in negative correlation ........................................................ 9

3.3. Forecast the trend of the dollar in 2015 ..................................................................................... 9

III. RESULTS ................................................................................................................................... 10

IV. FUTURE WORK ....................................................................................................................... 10

V. CONCLUSION........................................................................................................................... 10

REFERENCES .................................................................................................................................. 11

Page | 1
 US Dollar in International Market 2015

ABSTRACT
The U.S. dollar is the world's foremost reserve currency and the standard unit of exchange in
global markets for commodities such as gold or petroleum. It is also widely and frequently used
in international transactions, especially in Asia where many countries billed more than 80% of
their exports in dollars, according to Bloomberg’s data in 2009. The common factor crucial for
the continued validity of the above support for the dollar's international status is confidence in
the stability of its purchasing power and confidence in the government to honor its debts. Every
single minor fluctuation in exchange rate of this currency may create a huge effect to global
trade; therefore, it is essential to study American Dollar or make a prediction in its exchange rate
for a period of price stability. This report will focus on USD’s roles in international market and
the trend in its value.

Page | 2
 US Dollar in International Market 2015

I. INTRODUCTION

1. Background
US Dollar used to be the central of the Breton Woods system at the end of World War II. At
the present, the heyday of international business has boosted US Dollar’s status in global market
as one of the most powerful currencies for reserve and trading.
The international role of the dollar still remains substantial even after the introduction of the
euro and despite changes in the value of the dollar through different periods. Factors that may
have contributed to this continuing strength include inertia in currency use in certain transactions
(Krugman, 1980). That is the dollar’s established and deep role in international markets which
may make it difficult for users to shift to a less entrenched currency.
In the markets for international trade and finance, everyone uses the dollar because everyone
else is using the dollar. Users tend to favor the currency of countries that have large economies
and relatively stable rates of output and employment growth, as well as low and stable
inflation. USA has proved to be the country like that and American economy still is the biggest
economy despite its financial crisis in late 2007.
The evidences overall suggests that the dollar is likely to remain prominent as an
international currency and its primacy cannot be easily taken and replaced.

2. Focus and scope

Focus: The report only shows a brief history of US Dollar but mainly focuses on US Dollar’s
role in global market and the trend in its value.
Scope: The value of transactions in US Dollar and USD’s exchange rate to other powerful
foreign currencies from 2005 to 2014.

3. Limitation
- The data shown in this report might have not been updated because of the limitation in
information and approach of the undergraduates.
- Some statements in this report may be personal and subjective but they are according to the best
knowledge of authors.
- Method of collecting data is desk research which is lack of real experience and may lead to
inequitable information.

4. Research methodology
The report makes use of both qualitative and quantitative research methods; however, the
qualitative method prevails over the quantitative method.

Page | 3
 US Dollar in International Market 2015

5. Structure
The report is organized into 5 parts as follows:
i. Introduction
ii. Technical sections
 The brief history of US Dollar
 The importance of USD in International Market
 The trend in price of USD from 2005 to 2014
iii. Results
iv. Future work
v. Conclusion

Page | 4
 US Dollar in International Market 2015

II. TECHNICAL SECTIONS

1. The brief history of US Dollar
- The origin of name “dollar” and sign
Dollar is named after a Spanish coin “peso” which equals to 8 “silver reals”. When Spanish came
to America, they still used their currency and started to call “peso” as “Spanish dollar” in The United
States to distinguish it from “Mexican peso” in Mexico. The first dollar coins issued by the United
States Mint (founded 1792) were similar in size and composition to the Spanish dollar.
The symbol $, usually written before the numerical amount, is used for the U.S. dollar (as well as
for many other currencies). The sign was the result of the scribal abbreviation " " for “peso”.
The “p” and the “s” eventually came to be written over each other giving rise to $.
The name “buck” also refers to “dollar”.
- Denominations of US Currency
The base currency of the United States is the U.S dollar, and it is now printed on bills in
seven denominations of $1, $2, $5, $10, $20, $50, and $100.
However, U.S. currency previously included five larger denominations which were issued
between 1780 and 1934. Notes in the denominations of $500, $1,000, $5,000, and $10,000 were
printed for general use; a $100,000 note was printed for certain internal transactions. However, these
large denominations are not used anymore.
Coins: 1 cent = penny; 5 cent = nickel; 10 cent = dime; 25 cent = quarter; 100 cent = dollar

2. The importance of USD in International Trade

By many means, the US dollar is the most important currency in the world. It plays a central role
in international trade and finance.
The US dollar serves as a central currency in the exchange rate arrangements of many countries.
Many countries have dollar-based exchange rate arrangements. With exchange rate regimes defined
according to the Reinhart and Rogoff (2004) approach, several countries currently are dollarized or
have currency boards using the dollar and 89 have a pegged exchange rate against dollar (table 1).
The share of countries linking their currency to the dollar in some manner has been stable since
1995, and this group represents more than a third of world GDP (excluding the US)

Page | 5
 US Dollar in International Market 2015

Table 1: Countries reporting dollar-based exchange rate

The dollar remains the dominant currency in foreign exchange reserve accounts. Foreign
governments’ foreign exchange reserve accounts, essentially the governments’ foreign currency
savings, can be large. In 2009, dollar assets accounted for about two-thirds of reserve assets of
industrialized and developing countries (Figure 1)

Figure 1: Foreign Currency Reserve Holdings

Source: International Monetary Fund, Currency Composition of Official Foreign Exchange Reserves
(CCFER) data
The dollar is a leading transaction currency in international trade. With an 86% share in the
volume of international trade and financial markets-more than twice the share of the euro-the dollar
continues to dominate the financial markets (Bank for International Settlements, 2008). Turnover
volumes in foreign exchange markets have more than doubled in the past decade, implying large
numbers of transactions measured in reference to the dollar

Page | 6
 US Dollar in International Market 2015

The dollar is also widely used in the invoicing of international trade. Goldberg and Tille (2005),
the follow-up study by Kamps (2005), and the ECB (2005) report provide extensive cross-country
evidence on the currency invoicing of international trade transactions. Their analyses show that both
the U.S. dollar and the euro are extensively used in international trade transactions, with the dollar
still the dominant currency in the whole world and Euro is only popularly used in Europe. Table 2,
using data reported in these studies, shows the use of dollars in invoicing country exports and
imports at the latest year for which data are available across countries.
Table 2: U.S. Dollar and Euro Use (%) in the Export and Import Invoicing of some countries

Source: The International Role of the Dollar and Trade Balance Adjustment, Linda Goldberg and Cédric
Tille, 2005
The table shows that international trade transactions between other countries and the United
States are primarily invoiced in U.S. dollars. More than 99 percent of U.S. exports and 92 percent of
U.S. imports were invoiced in dollars in early 2003. The U.S. dollar is used intensively in the United
Kingdom’s international trade transactions, on 26 percent of U.K. total exports and 37 percent of
U.K. imports. In Asia, both Korea and Thailand use the dollar in invoicing more than 80 percent of
their export and import transactions. For Japan, Australia, and Malaysia, the dollar is used in
substantially more than 50 percent of trade transactions. By contrast, the dollar remains a dominant
currency in the invoicing of both exports and imports by countries outside of Europe.

Page | 7
 US Dollar in International Market 2015

The dollar also serves as a prominent currency in the international debt markets. One measure is
the share of all outstanding debt securities, issued anywhere in the world, denominated in dollars.
According to this measure, the dollar’s share stands at approximately 39%, down only slightly from
a high of 42% in 1999. The dollar remains the primary financing currency for issuers in the Middle
East, Latin America, Asia, and the Pacific area.
In conclusion, the US dollar today is still a global currency and plays a significant role in
international trade.

3. The trend in price of USD from 2005 to 2014

From 2005 to 2014, the price of USD has many fluctuations. To find more about this issue, we
will survey through the US Dollar index and the trend of Gold Price.
3.1. US Dollar Index
It is a measure of the value of the U.S. dollar relative to majority of its most significant trading
partners. It measures the performance of the dollar against a basket of other currencies including
EUR, JPY, GBP, CAD, CHF and SEK. This index is similar to other trade-weighted indexes, which
also use the exchange rates from the same major currencies.
Figure 2: US Dollar Index, 2004 - 2014

(Source: Investing.com)
USDX started in March 1973, soon after the dismantling of the Bretton Woods system. At its
start, the value of the US Dollar Index was 100.000. It has since traded as high as 164.7200 in

Page | 8
 US Dollar in International Market 2015

February 1985, and as low as 70.698 on March 16, 2008 because of the finance crisis. And now, the
USDX is much higher. The current level is the highest level in 11 years (from January 02/2004) of
the US Dollar Index. It shows the back strength of the dollar against other currencies such as Euro,
Japanese Yen...
3.2. USD Index and Gold Price trend in negative correlation
Anyone who takes attention on gold and currency markets closely will find that the Gold Price
and Dollar Index generally trend in negative correlation. As the dollar rises, the gold price in dollar
falls, and vice versa. So we can find the real price of USD through gold.
Figure 3: Gold price from 2005 to 2014

(Source: goldpriceoz.com)
Generally, the price of gold had been jumpy. It had risen gradually from min = 414.5 USD/oz. in
2005 to max = 1895 USD/oz. in 2011 and then decreased. It means that the price of USD had
decreased from 2005 to 2011. However, from 2008 to 2009, the price of gold had decreased so it
means that the price of USD had risen at that period. It is because of the financial crisis in United
States from 2007 to 2009. The crisis made the US dollar rise. Because the US dollar is the most
popular payment instruments in the world today, so global investors bought dollars to improve its
liquidity, pushed the price of US dollar up. And from 2011 to now, the price of USD is more and
more rising because of United States’ economic growth.
From May 6/2014 to now, the dollar has gained about 20% against the yen and the Australian
dollar, 15% against the euro and 12% against the pound; the ruble was devalued to 50 %.
Foreseeing this trend, a number of countries have moved their status to accumulate dollars and
sell currencies. But this is only short-term trend, but it also contributes to more scarce dollars and
pushes the value of the currency higher.
3.3. Forecast the trend of the dollar in 2015

Page | 9
 US Dollar in International Market 2015

Analysts in the foreign exchange market confirmed the rise of the dollar is strong and
unprecedented. They foresee that the dollar will continue upward trend for some time, especially as
Fed gives more clearly signals about the possibility of rising interest rates. They predicted that the
euro would change about $ 1.15 at the end of 2016, compared with about $ 1.27 now. It is entirely
probable; the dollar has risen by more than 8% against the euro in the past six months. It creates
pressure on the exchange rate adjustment for many other currencies.
III. RESULTS
- Knowledge about the origin of name US Dollar and its denominations
- US Dollar’s roles in international trade:
The role of this currency is undeniable as a central currency in the exchange rate arrangements of
many countries, a leading transaction currency in foreign exchange market and a most widely used
currency in the invoicing of international trade.
- US Dollar’s value and the trend in its price:
The research has examined US Dollar’s value through USD Index and the gold’s price. It also shows
that USD’s price is increasing recently and keeps going that way in the near future.
IV. FUTURE WORK
With the increasing use of Euro and Japanese Yen in transactions, US Dollar’s domination is
unpredictable in the future. If there’ll be a chance, we would like to go further or encourage other’s
studies on the ability of USD’s replacement by Euro or the Japanese Yen in International Business.
We also expect to compare the power of these strong currencies in global market.
V. CONCLUSION
Money serves three functions: a medium of exchange, a unit of account and a store of value.
International money does the same. It is used to set international payments, to fix prices and to be
held as a liquid asset for international transactions. Especially, with the blooming of international
trade, it is important to see a common powerful currency like US Dollar as a mean of doing business
among countries. Changes to the global economy could have major implications for the international
transmission of shocks, the value of the dollar, and welfare across economies. Accordingly, it seems
important for policymakers to monitor use of the dollar in international economic activity and to
understand the potential causes and consequences of the dollar’s changing international role. This
research may help by giving the brief information of USD and its importance in international
markets as well as the trend in its price and the prediction for future. Despite the domination of US
Dollar today, there is also the ability that its status in global trade can be replaced by other powerful
currencies in the market.

_The end_

Page | 10
 US Dollar in International Market 2015

REFERENCES

David Gaffen, “Somehow, the Dollar Regains Safe-Haven Status”, The Wall Street Journal,
Retrieved October 22, 2008.

Baek Jungho, Kranti Mulik and Won W. Koo, “The Role Of The U.S. Dollar In International
Trade”, 2006.

“Bloomberg.com: Worldwide”, 2007-06-04, Retrieved November 4th, 2009.

Currency Composition of Official Foreign Exchange Reserves (CCFER), International Monetary

Fund, 2010.

Linda Goldberg and Cédric Tille, the International Role of the Dollar and Trade Balance
Adjustment, 2005.

USD Index, Investing.com, January 2015.

Gold’s price research, goldpriceoz.com, 2015.

Page | 11