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ECONOMICS REPORT - Dollar Is World's Most Traded Currency. But Why?By Mario Ritter
Broadcast: Friday, October 27, 2006
This is the VOA Special English Economics Report.
A listener in Manaus, Brazil, Luiz Roberto Alves da Costa, has a question about money. He asks why the American dollar is more stable or secure than most currencies in the international monetary system.
Stability in the value of a nation's currency depends on foreign exchange markets and economic conditions.
The clearest measure of stability is the exchange value of a currency over time. Trading takes place on foreign exchanges around the world.
Since nineteen seventy-six, most major economies have used a system of floating exchange rates to value their currency. This means the value of one currency is always changing in relation to others.
People who travel pay the spot exchange rate when they have to trade currency. If they wait long enough at the exchange office, they might see the rates change a little within hours or even minutes.
Companies and individuals buy and sell an estimated six hundred thousand million dollars on the spot market each day.
The dollar is by far the world's most traded currency. And it is worth more than most. The euro, however, is currently worth about one dollar and twenty-seven cents. And the British pound buys almost two dollars.
A costly currency adds to the price of exports. That can hurt economic growth. Trade deficits can also grow because a strong currency lowers the cost of imports.
Inflation is another influence on the value of money. High inflation cuts the buying power of a currency over time.
The United States currently has a yearly inflation rate of about three percent. The Federal Reserve considers this within acceptable limits.
This week the central bank left interest rates unchanged for the third month, after seventeen increases. Economic growth has slowed this year and inflationary pressures are expected to ease over time.
Even the strongest currencies change in value over time. But there is one basic reason why the market for dollars is mostly stable. The dollar is the currency of the world's biggest economy, worth twelve million million dollars.
Larger markets are generally more stable than smaller ones. And nations that trade with the United States, especially in East Asia, continue to accept dollars for the goods they sell to Americans.
But there are other issues to consider about the dollar and its place in the world, and we will examine these in an upcoming report.
And that's the VOA Special English Economics Report. I'm Mario Ritter.
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