intro – usd: US dollar

USD, i.e. US Dollar is the currency of United States of America. USD is the most liquid and most traded global currency. In addition, USD is also the primary reserve currency of the world. It is also widely used in international trade. Hence, USD is the base currency for all major currency pairs.

When two nations or regions trade with each other, it is common for them to use USD as the base currency. This is because USD currency pair is more liquid than non-USD currency pair. This enables large transactions to be done without impacting domestic currency exchange rates. Therefore, majority of traded global commodities like Gold, Crude Oil etc. are priced in USD.

USD is a fiat currency. Ever since USD convertibility to gold was abandoned in 1971, USD is not backed by any physical asset. It’s backed by promise of the US government to pay it’s liabilities. And, the investors trusts US government to pay it’s debts on time. Hence US Treasury bonds have a very low probability of default and US govt. can borrow at favourable interest rates.

US dollar is also world’s de-facto currency for countries with failed political and/or monetary policy infrastructure. A few nations including Panama, Ecuador, and El Salvador are dollarized. They no longer have their own currency but are wholly dependent on USD for trade. There is an even longer list of countries that are partially-dollarized, such as Argentina, Angola, Cambodia, Lebanon, Nicaragua and Russia. While each maintain local currencies, it is common for USD to be used in a portion of domestic transactions.

USD USD origins

Like the other newly discovered territories, the first American Dollar was based on the Spanish dollar. It was in wide circulation from 16th to the 19th century. In addition to Mexican, Peruvian and American Dollars(all based on Spanish silver dollar), there were yet more currencies in circulation.

People used to accept coins from various English colonies. Settlers and traders in Dutch New Netherland Colony (New York), used Lion dollars. The lion dollar also circulated in English colonies during the 17th and early 18th century. These coins were quite similar and worn. So the design was not fully distinguishable. People often referred to these coins as dog dollars, as they could not tell the difference.

A number of new settlements in the United States of America initially used the British Pound Sterling. This then became a local pound, but this was not of the same value as the British Pound Sterling. For instance New Hampshire pound, New York pound, North Carolina pound, Pennsylvania pound, Virginia pound etc..

The Continental Congress had issued Continental dollars between 1775 and 1779 to help finance the American Revolution. The paper Continental dollars were demand notes. So, it was a promise to the bearer of Spanish milled dollars. But, nobody ever redeemed these dollars for silver. Also, they lost 99% of their value by 1790 despite the American victory.

USD USD in 19th century

The United States Congress enacted the Coinage Act in 1792. The American dollar coins issued at this time were similar in size and composition to the Spanish dollar. The US govt. defined a dollar at 371.25 grains (24.056 g) of silver. They also defined the value of gold coins relative to silver. The US congress regularly reviewed and revised this gold-silver ratio throughout the 19th Century.

The US govt. also printed US Treasury notes during the 19th century to fund government efforts in times of crisis. For instance during financial crises of 1837 and 1857 when there was a drop in public revenue. And also during Mexican-American war and American Civil War. However, the bearer of these notes could not convert them to gold or silver. The government then reinstated the convertibility of US dollars in paper notes to gold and silver in 1878. Gold and silver USD coins continued in circulation at the same time as well.

The paper form 19th century currency underwent a lot of changes and came in a lot of variety. Some of it was very different from the USD we know today. For instance there were the Demand Notes, small Treasury Notes, Legal Tender notes, Unites States Notes etc. Some of these paper USD notes guaranteed interest, some didn’t.

FX Prediction USD gold standard

The US Congress enacted the Gold Standard Act in 1900. This abolished the bi-metal standard for American dollars. It then defined one USD as 23.22 grains (1.505 g) of gold. However, silver coins were in circulation until 1964. Over the years, the amount of gold that 1 USD was pegged to, varied. This was based on changes in US balance of payments account. It was also based on total Gold reserves of Unites States.

After World War II, 44 countries signed the Bretton Woods agreement, a new international monetary system. They agreed to keep their currencies fixed (but adjustable in exceptional situations) to the USD. And, US government fixed the value of USD to a certain amount of gold. However, in the 1960s, European and Japanese exports became more competitive with US exports. The US share of world output decreased and so did the foreign need for USD. Thereby making converting those USD to gold more desirable. This also led to rise in US domestic inflation.

On August 15, 1971 US ended the convertibility of USD to gold. This brought the Bretton Woods system to an end. It also caused a big impact to the international monetary system.

USD the new international monetary system

Following the end of the convertibility of USD to gold, three important changes happened.

Firstly, USD became a free float currency on the foreign exchange markets. In addition, some of the currencies that were pegged to the USD also became free float. Secondly, USD became a fiat currency. This means supply of USD is based on the ability of US government to pay it’s debt. So, this addressed the issue of potential scarcity of USD due to limited precious metal reserve. As a result, other countries also adopted the fiat currency based monetary system. Finally, this created a dynamic foreign exchange market, while still maintaining USD as the primary global reserve currency.

USD final comments

It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.

Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.

Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.

FX Prediction how to apply this to trading

STOKAI provides daily fx prediction using algorithms based on all factors that impact the price of given currency pair. Then, it evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial


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