Why the US Dollar Matters to Every Currency Pair

Whether you watch EUR/USD, GBP/JPY or USD/INR, the US dollar is almost always part of the story. Even pairs that do not contain the dollar are often influenced by it. This explainer covers why the dollar holds this central role, how it connects to every pair, and what tends to drive it.

The dollar's place in the market

According to the Bank for International Settlements (BIS) 2022 Triennial Survey, global foreign exchange turnover averaged about $7.5 trillion per day, and the US dollar was on one side of close to 90% of all trades. No other currency comes close to that share.

Several features explain this dominance:

• Reserve currency. Central banks around the world hold a large share of their foreign exchange reserves in dollars.
• Trade invoicing. Many international trade transactions, including much of the trade in commodities such as oil and gold, are priced in dollars.
• Funding currency. Banks and companies outside the United States borrow heavily in dollars.
• Deep markets. US Treasury securities form one of the largest and most liquid bond markets in the world, which makes the dollar a natural home for savings and collateral.

The dollar as a vehicle currency

Because the dollar is so liquid, it often acts as a vehicle currency. Rather than exchanging two less-traded currencies directly, a bank may convert the first into dollars and then the dollars into the second. Liquidity in many currency pairs therefore depends on liquidity in their dollar legs.

This is also why the major currency pairs, such as EUR/USD, USD/JPY, GBP/USD and USD/CHF, all include the dollar and usually have the tightest spreads.

How the dollar shapes cross pairs

A cross-currency pair is one that does not include the US dollar, such as EUR/JPY or EUR/GBP. Cross rates are closely linked to the two corresponding dollar pairs.

Illustrative example. Assume EUR/USD is quoted at 1.0850 and USD/JPY at 150.00. The implied EUR/JPY rate is:

EUR/JPY = EUR/USD × USD/JPY = 1.0850 × 150.00 = 162.75

If the dollar strengthens against both the euro and the yen by similar percentages, EUR/JPY may barely change, because the two moves cancel out. If the dollar strengthens against the euro but not the yen, EUR/JPY falls. Arbitrage between dealers keeps quoted cross rates closely aligned with these implied values; see arbitrage.

The practical lesson is that a move in a cross pair can sometimes be traced to a dollar move that affected one leg more than the other.

Measuring broad dollar strength

Because a single pair reflects two currencies, analysts often use an index to measure the dollar against a basket. Two common approaches are:

• The US Dollar Index (DXY), which measures the dollar against six major currencies and is heavily weighted toward the euro. See our Dollar Index page.
• Trade-weighted indexes, such as the broad dollar indexes published by the Federal Reserve, which weight currencies by their importance in US trade.

If EUR/USD, GBP/USD and AUD/USD are all falling while USD/JPY and USD/CAD are rising, the common factor is likely broad dollar strength rather than separate stories in each economy.

What tends to drive the dollar

US monetary policy

Federal Reserve decisions and guidance shape US interest rates, which influence global capital flows. Expectations of higher US rates relative to other economies have historically tended to support the dollar, and expectations of lower relative rates tended to weigh on it. See our article on how central bank decisions move currency markets and the lesson on interest rates and currencies.

US economic data

Employment, inflation and growth data shift expectations for Fed policy. That is why releases such as US payrolls and consumer prices can move the dollar against many currencies at once. Our lessons on employment data and inflation and forex explain these releases.

Global risk sentiment

During periods of stress, demand for dollars often rises as investors seek safety and liquidity, and as borrowers scramble for dollar funding. In calmer periods, investors may move money into higher-yielding or growth-linked currencies, which can weigh on the dollar. The relationship is not fixed, but it is widely observed.

Commodity prices

Since many commodities are priced in dollars, commodity moves and dollar moves can interact, particularly for commodity-linked currencies such as the Canadian, Australian and Norwegian currencies.

Why it matters for Indian readers

For readers in India, USD/INR is the most widely followed exchange rate, and the rupee's value against other currencies, such as EUR/INR, is shaped by both the rupee's moves against the dollar and the dollar's moves against those currencies. Understanding broad dollar trends helps explain moves in INR crosses as well as in import costs such as oil.

Practical takeaways

• Check the dollar first. Before analyzing a pair, ask whether the dollar is moving broadly.
• Watch US events. Major US data and Fed decisions can affect pairs that do not include the dollar.
• Mind correlation. Holding several dollar pairs can concentrate risk on a single factor. Our lesson on portfolio risk covers this.
• Size positions carefully. Use the Position Size Calculator and remember that leveraged trading carries substantial risk of loss.

Summary

The dollar is on one side of the large majority of forex trades, acts as a vehicle and funding currency, and anchors cross rates through the dollar legs that make them up. Broad dollar moves, driven by Fed policy, US data, risk sentiment and commodities, often explain moves across many pairs at once. This article is educational and is not a recommendation to trade any currency.