Even traders who have never set foot in the U.S. or laid hands on a U.S. dollar pays close attention to the American currency. The USD is the most frequently traded currency in the forex market, being part of 84.9% of all transactions and making up half of the most common currency pairs. The International Monetary Fund (IMF) reports that over 60% of the world’s forex reserves are U.S. dollars, with virtually every government, bank, company, and individual owning and trading them.

So what explains the USD’s overwhelming market significance, despite the fact that it’s been largely devalued during the recession and that other economies are on the rise? The main reason is that it is the world’s most widely held reserve currency; that is, countries hold it in large quantities and use it as a common currency when trading internationally. For example, if Japan wants to import something from Italy, it can dip into its USD reserves instead of trading its yen for euros, or as is more common, changing from yen to USD to euro. With a single transaction using a readily available currency, they avoid the high transaction costs. Over the last 15 years, the USD’s share of global currency reserves ranged from 59% to 71% (it was at 61.7% as of October 2011).

Another main reason, and one that’s related to the point above, is that many cross-country transactions use the U.S. dollar as a medium of exchange. The prices of important resources such as oil, for example, are quoted in U.S. dollars. If one country wants to buy oil from another, the buyer has to trade its currency for USD—even if none of them are the U.S. The U.S. financial system is also one of the most liquid, which means that it is easily traded and prices aren’t as prone to drastic changes.

Finally, there are obvious reasons, such as the U.S. economy being the largest in the world, and the U.S. itself being the only military superpower in existence to date. Its political system is also extremely stable, a fact that has proven itself in the last few years. The euro, thought to offset some of the USD’s power when it was created in 1999, has fallen sharply in large part because of political struggles in member states. All this to say that if you’re in the forex game at all, it does pay to watch the USD closely!