For example: Why does it matter that a trade happens in USD instead of euro? They all can be made equivalent right?
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China has been waging an economic war on us for some time. They devalue their currency so that their exports will be cheaper and countries will buy more of it
the USA copied this strategy. Google “the fiscal cliff” the media made a sensational show of the US congress supposedly risking defaulting on our debt, they never intended to do that at all, it was all smoke and mirrors so the USA could by default lower the currency of its values to boost its exports
Because Saudi arabia demands all payments for oil in dollars. All nations must purchase dollars to purchase oil, meaning certain transactions cannot even be made without the proper currency
im bad at this. But i hope those 3 examples help (:
Because different currency inflate at different rates. Looking at the US we have a reported rate of 8% currently. This means you have 8% less buying power. If you look at turkey they had a 50% inflation rate last time I checked.
If you were to unify things like they did with the euro this causes other problems. Places that make more or have more natural resources will be able to earn more and leave others with less. Germany thrived under the euro while Greece struggled.
Inefficiency in markets can be a good thing and help distribute wealth.
The more people and economies use your dollar and consider it to have a stable and high worth in real world goods, like oil, the better for you
Why does it matter to the parties making the trade?
You’re right that currencies can be bought and sold. So if I received euros in a trade I could exchange those for pounds that I can use to pay my british workers.
However there are two problems here.
First, the exchange rate can change. Let’s say we agree a €100,000 euro contract and payment will be due in six months. Well if the pound drops in value in that time I’m going to lose out. So I’m taking a risk. Of course, if the other party is based in the eurozone and we priced in pounds, they’d be the one taking the risk.
Second, there’s always a cost to exchanging money. So it’s beneficial to be paid in the currency you actually want, or to pay in the currency you normally use.
Why does it matter to countries?
The first reason links back to what I just said: if trades are done in their currency, its their companies and citizens who gain these benefits.
The second is that trade using your currency creates demand for that currency. The pros and cons of this are a little complicated, but generally it can help make your currency more stable and it increases your influence around the world. This is one reason the US is able to hold a large foreign debt. Dollars are in great demand for trade, and also countries (and companies) need to hold reserves of dollars to pay for trade if something goes wrong.
Lot’s of people commenting here who have never actually worked in the international trade sector. I spent several years working in factoring, which is a type of international trade financing product. We move the money to match the flow of imports and exports.
The currency of a trade is important because it determines which legal system governs the trade. The contract enforcement system in the United States is very well respected. There are literally centuries of legal precedent, so when a dispute arises (for example, some of the goods that arrived at the port were water damaged), buyers and sellers know it will be handled fairly and consistently. As a result, doing a trade in dollars is perceived as less risky.
Suppose Argentina wanted to purchase oil from Qatar. The business in Argentina would not want to have to use Qatari courts, and the business in Qatar would not want to use Argentinian courts. There is too much risk that courts will be politically influenced and unfair. Instead, Argentina will buy the oil in dollars, and wire the money from an account at the New York City branch of Provincia bank to the New York City branch of the Commercial Bank of Qatar. Any dispute between the two will be heard in the New York courts, which both parties find acceptable.
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