The liquidity issue

Looking at foreign exchange transactions in the international arena, daily turnover in the forex market is estimated at $2 trillion.

“Over 95 percent of all FX transactions involve the U.S. dollar,” notes Bank of New York’s Woolfolk. Even countries within the NAFTA region need the dollar as an intermediary of exchange, he says.

“If you were to move money from Canada to Mexico, you would sell Canadian dollars, buy U.S. dollars and buy the Mexican peso because there is no liquid cross between the Canadian dollar and the Mexican peso,” Woolfolk explains. “Also, there is no truly liquid cross between the Canadian dollar and the pound sterling. There is more liquidity and more precise prices in dollar currency exchange rates. As a result, the U.S. dollar has a unique role in the global system.”