Why the US economy matters to everyone

The United States is made up of 50 states and one federal district, most of them in North America, plus several territories in the Pacific and the Caribbean. Since independence from Britain in 1776 it has grown into the largest economy in the world. Because of that size, a surprise in US spending, jobs or policy can ripple through markets everywhere.

Key facts at a glance

Neighbours: Canada to the north and Mexico to the south, with Caribbean neighbours such as Cuba nearby.
Size and people: roughly 3.8 million square miles and a population of over 330 million, so the country is large but not densely populated.
Capital: Washington, D.C. The President is head of both state and government.
Currency: the US dollar (USD).
Main imports: industrial supplies such as crude oil, capital goods (computers, telecom equipment, machinery, car parts), consumer goods (cars, clothing, medicines, furniture, toys) and farm products.
Main exports: high-value industrial goods (aircraft, semiconductors, computers, car parts), chemicals, cars and medicines, farm products such as soybeans and corn, and globally known consumer brands.
Main trading partners: Canada, Mexico and China are traditionally the largest, followed by Japan and Germany. The exact shares shift from year to year.
Time zones: six main zones, from Hawaii (GMT-10) to the East Coast (GMT-5), where New York sits.

The shape of the economy

The US produces more output than any other country, and its income per person is among the highest in the world. Aircraft, cars and semiconductors matter, but around 70 to 80 percent of output actually comes from services such as finance, health care, retail and technology.

The US is also known for running a large and persistent trade deficit: it buys more goods from the rest of the world than it sells. It also hosts the world's largest stock and bond markets, centred in New York, so events inside the US quickly become events for the whole world.

Monetary and fiscal policy

The Federal Reserve (the Fed) is the central bank and runs monetary policy, which means managing how much money and credit flow through the economy. It has two goals, often called its dual mandate:

Stable prices, which in practice means keeping inflation low and steady (the Fed aims for about 2 percent a year).
Maximum sustainable employment, meaning steady growth and a strong job market.

Decisions are taken by the Federal Open Market Committee (FOMC), which meets eight times a year. Its two classic tools are:

Open market operations: buying or selling government securities (bills, notes and bonds). Buying adds money to the banking system; selling drains it.
The federal funds rate: the rate banks charge each other for overnight loans of reserves. The FOMC sets a target range for this rate and steers it there, and it ripples out to mortgages, business loans and savings rates.

Fiscal policy belongs to the government, with the Treasury Department managing the money. It works through taxes and public spending. To support a weak economy it can cut taxes and spend more on things like roads and schools; to cool inflation it can raise taxes and spend less.

Liquidity: the dollar is everywhere

The dollar sits on one side of roughly 9 out of every 10 currency trades in the world. Major commodities such as crude oil and gold are priced in dollars too, so a buyer in Tokyo or Frankfurt usually needs dollars to complete the deal. That makes it the most liquid currency on earth.

The "strong dollar" policy

For decades, US officials have publicly supported a "strong dollar". The idea is that a dollar that keeps its value is good for the US and for the countries that trade with it, so policy should avoid deliberately weakening the currency.

Currencies pegged to the dollar

The dollar is the world's main reserve currency, and some countries go further and peg their own currency to it. Under a peg, a government or central bank promises to buy or sell its currency at a fixed rate against the dollar, and it holds large dollar reserves to defend that rate. This multiplies the dollar's importance: those economies are tied to US policy, and a sharp fall in the dollar would hit every country whose money is pegged to it.

Key economic data for the dollar

Non-Farm Payrolls (NFP): the monthly change in the number of jobs outside farming. One of the most market-moving releases of the month.
Gross Domestic Product (GDP): the total value of final goods and services produced in the country.
Retail Sales: the monthly change in total sales at stores and online. A version that excludes car sales is watched closely because car purchases swing a lot.
Consumer Price Index (CPI): tracks price changes in a fixed basket of goods and services. Core CPI removes food and energy because their prices jump around.
Personal Consumption Expenditures (PCE) price index: another measure of consumer prices, and the one the Fed uses for its inflation target.
University of Michigan Consumer Sentiment: a monthly survey of how confident households feel. Confident consumers tend to spend more.

What moves the dollar

Gold: when investors fear that inflation will erode the dollar, many move into gold, which holds intrinsic value. A strong rise in gold can be a sign that the dollar is losing appeal.
US growth: a strong economy attracts foreign investors, and they must buy dollars to invest. More demand for US assets means more demand for the currency.
Capital flows: the US has the deepest financial markets in the world. Money flowing in supports the dollar; money flowing out can weaken it significantly.
Global events: because the dollar is in almost every trade, a growth surprise in Australia or a stock market crash in Asia can move it in the short term.
Bond yield spreads: investors chase the best return. If yields abroad rise while US yields stay flat or fall, investors may sell US Treasuries, selling dollars in the process, to buy foreign bonds.
Fed rate expectations: if traders expect the Fed to raise rates, dollar assets look more rewarding and the currency tends to firm. If they expect cuts, money may leave. Fed officials often hint at their thinking in speeches, so traders follow them closely.

How USD pairs are priced

When USD is the base currency (USD/XXX), a standard lot is 100,000 USD and a mini lot is 10,000 USD. Profit and loss are counted in the quote currency. A pip is 0.0001 for most pairs (0.01 for yen pairs), so one standard lot earns or loses 10 units of the quote currency per pip. To express that in dollars, divide by the rate. Example: at USD/XXX = 1.4000, one pip on a standard lot is 10 XXX, which is 10 / 1.4 = about 7.14 USD.

When USD is the quote currency (XXX/USD), a standard lot is 100,000 units of XXX and profit and loss are counted directly in dollars: about 10 USD per pip on a standard lot and 1 USD per pip on a mini lot. Margin depends on the rate. Example: at XXX/USD = 0.8900, one standard lot is worth 89,000 USD, so with 100:1 leverage the margin needed is about 890 USD. If the rate rises, the position is worth more and needs more margin; if it falls, it needs less.

Ways to trade the dollar

Compare economies. Set US data against data from another major economy. If US retail sales come in strong on the same day UK jobs data disappoints, the gap between the two supports a weaker GBP/USD.
Watch the US Dollar Index (DXY). It measures the dollar against a fixed basket of major currencies and shows the dollar's overall direction. A rising index can support a decision to sell EUR/USD.
Follow the policy rate. A higher federal funds rate means better returns on dollar assets, which tends to attract buyers.
Listen to Fed officials. Speeches and press conferences often give clues about the next policy move, and with it the dollar's direction.