Why Opening a Forex Account in USD is the Best Solution for a Trader
When deciding to open a Forex account, traders must choose the currency of the trading account. It isn’t mandatory to use the same currency as the country the Forex broker is from.
For instance, if trading with a broker in the United Kingdom, traders may open an account in USD, GBP, or even other currencies like the EUR. The decision is not an easy one and depends on many factors. However, in the end, the best solution to funding a trading account in the 21st-century is to stick to the world’s reserve currency – the U.S. Dollar.
The U.S. Dollar as the World’s Reserve Currency
Any Forex education course that focuses on the monetary history and fundamental analysis mentions the role of the U.S. Dollar in today’s international financial system.
First, the American Dollar is the world’s reserve currency. Since the Bretton Woods agreement in the 1940’s, the dollar became the dominant currency for international transactions.
And this was true even before the United States to break the dollar-gold peg in the 70’s. Starting with that moment, the gold standard was broken, and all countries followed the same path later down the road.
The world’s reserve currency status implies that sovereign nations prefer to keep their excess reserves in USD, and not in the local currency. Hence, the liquidity and demand on the USD is always reliable and flows allow a quick conversion in time of need.
Second, the USD is the currency used in trading commodities like oil. Since the Kissinger’s deal with the Saudi Arabia right after the Nixon’s shock (i.e., Kissinger negotiated military protection in return to Saudi Arabia selling its oil only in USD and reinvesting part of the outcome in U.S. debt – treasuries).
To this day the petrodollar brings enormous benefits to the United States, creating a constant demand worldwide for American dollars to pay for oil, as other countries embraced the same regimen.
Third, trading conditions in the Forex market change from optimism to pessimism in the blink of an eye. As the world’s reserve currency, the USD has a so-called safe-haven status. It means that in turbulent times in the international financial markets, the USD tends to gain across the entire Forex dashboard.
A good example comes from the 2008 financial crisis when the Fed in the United States cut the federal funds rate drastically to zero. Instead of depreciating aggressively, like it was normal, the USD did precisely the opposite: it got stronger and stronger by the day.
Traders realized that if the Fed cuts so deep the interest rate level, the other banks will follow suit immediately, and they flew to safety, parking their money in the world’s reserve currency.
Forex trading is full of such examples when risk-on or risk-off market sentiments dominate the price action. The USD is king in risk-off markets when traders look for safety, and a trading account denominated in USD will get extra protection during such times.
To sum up, the USD trading account dominates the retail trading market because of the high-liquidity/strong protection offered to traders around the world. If deciding to keep your funds in a different currency, it better be an alternate plan to diversify the risk.