Ok I get that I might be horribly misinformed here but Im an A-Level econ student and Im going off of what my teacher told our class. So we learnt that when youre buying a foreign good, you must purchase the foreign countries currency by exchanging your own currency in order to buy that good right? So if the demand for certain imports increase, more people will exchange their currency for the other countries currency to buy those goods and the value of the other currency will appreciate from what I understand. But lets say that the demand for a currency decreases, then as per the demand and supply diagram the value of that currency depreciates, which can increase inflation and cause all sorts of problems. But then our teacher also told us that all trade is done in the US dollar? So how does what he told us apply or make sense? I guess Im kinda confused, I dont even know what im trying to ask. Like if all trade is done in the USD then why do other countries currencies fluctuate? There are probably tons of gaps in my knowledge but I wanna understand this properly cuz this has been bugging me, I wish econ was just maths lol.
Highschool student here, if trade is mostly in USD why do other currencies still fluctuate?
byu/Agreeable_Diver564 inAskEconomics
Posted by Agreeable_Diver564
4 Comments
USD is the intermediary. So if you have Indian Rupees and want to buy something in Brazil. Generally you go to a bank to make a payment. The bank takes your Rupees and exchanges it for USD. This USD is ‘sent’ to the seller’s bank and that bank converts it to Real to give to the seller. The USD acts as the trade currency.
This happens because nearly all banks have USD reserves while not many banks carry Brazil Real reserves. So it is easier for the Indian bank to convert the Rupees to USD because it is likely that the Brazilian bank doesn’t want to hold Rupees either.
Just picking up one point, your teacher is wrong (or may have been simplifying) about 100% of trade being done in USD. The dollar is dominant and particularly important for some commodities such as oil but plenty of trade is invoiced in other currencies, particularly in Europe and countries trading with Europe where the Euro is widely used.
https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-2025-edition-20250718.html
>The U.S. dollar share of international payments is about 50 percent and has even slightly increased in recent years. If intra-euro area payments are included, the dollar share is even higher at about 60 percent.
Lots of trade is done in USD, yes. But as operator, for example, of Interprint making toner cartridges in Thailand for American offices, there is still plenty of currency conversion done. After I make a sale, I tell my bankers to convert the currency to baht. I then pay my landlord, employees, and utilities bills with this bhat currency. My employees would not accept dollars generally. I’ll add that I may have overseas suppliers with whom I can pay in dollars. So I need not convert all of my international trade receipts to local currency.
Hope this helps
> But then our teacher also told us that all trade is done in the US dollar?
It’s an exaggeration to say that *all* international trade is done in US dollars. It’s used in about 54% of export trades, see the second dial [here](https://www.atlanticcouncil.org/programs/geoeconomics-center/dollar-dominance-monitor/).
It’s much more dominant in forex transaction where it is the other side of 88% of forex transactions.
> Like if all trade is done in the USD then why do other countries currencies fluctuate?
Lots of international goods and services trade is done in USD. However, even when this happens there must still be foreign exchange transactions. For example, let’s suppose that a company in the UK sell a product to a company in Albania in exchange for dollars. This UK company must pay it’s employees in pounds. So, it must offer the dollars on the forex market in exchange for pounds.
Now think about the company in Albania. Let’s say that it pays for this British product using profits. It’s profits are in Albanian Lek. It must exchange those Lek on the forex market to obtain dollars so it can pay for the products. So, the US dollar sits in-between the transactions but there are still forex trades occurring which change exchange rate. (As a sidenote, also notice that if the Albanian company gets a loan in dollars to buy the British product then it doesn’t need to do that forex trade).