| Updated: September 12, 2025Profile of the United States dollar – overview of the economy
This lesson will cover the following
- A look at the US economy
- Monetary policy authority – the Federal Reserve Bank
- Monetary policy tools
Economic overview
The United States is the world’s largest economic power, with a nominal Gross Domestic Product (GDP) of $16.8 trillion in 2013. It represents almost 25% of global nominal GDP. In terms of purchasing power parity, US GDP is also the highest worldwide, almost four times the size of Japanese output, five times the size of German output and seven times the size of the United Kingdom’s output. It represents almost 20% of total global GDP. US Gross Domestic Product per capita at purchasing power parity is the sixth largest in the world ($53,101 as of 2013, according to data from the International Monetary Fund).
The US economy is primarily service-oriented, as almost 80% of GDP is produced by sectors such as real estate, transportation, financial services, other business services and health care. As of 2013, the United States is the third-largest producer of oil (8,453,000 barrels per day, or 9.97% of global oil production) and the largest producer of natural gas (66.5 billion cubic feet per day).
- Trade Forex
- Trade Crypto
- Trade Stocks
- Regulation: NFA
- Leverage: Day Margin
- Min Deposit: $100
The country is the second-largest manufacturer in the world, as its industrial production was $2.43 trillion during 2013, larger than the output of Germany, France, India and Brazil combined. Major industries include petroleum, steel, automobile production, aerospace, construction and agricultural machinery, chemicals, electronics and telecommunications. The sheer size of the nation’s manufacturing sector contributes to the US dollar’s sensitivity to developments in the industry. US manufacturing output accounts for almost 18% of global manufacturing production.
Because the country has the most liquid stock and fixed-income markets in the world, it has consistently attracted increasing investment from abroad. Foreign Direct Investment (FDI) in the United States, evaluated on a cumulative stock basis, climbed to $2.7 trillion at the end of 2012, representing about 16% of the nation’s Gross Domestic Product. FDI that flowed into the economy in 2012 alone amounted to $166 billion. Net equity flows amounted to $59.6 billion in 2012 and $98.5 billion in 2011, while reinvested earnings increased to $105.8 billion in 2012 from $80.9 billion in 2011. It is worth noting that, if foreign investors’ expectations regarding returns in US asset markets are not met, a possible repatriation of funds could have a considerable impact on both US asset values and the exchange rate of the US dollar. If investors reduced their holdings of US dollar-denominated assets in search of higher yields elsewhere, the value of US assets would fall and the dollar would depreciate.
The United States is the second-largest trading nation in the world, following China. About 60% of all funds circulating globally as a result of international trade are in US dollars. US exports amounted to $2.27 trillion in 2013, while imports totalled $2.74 trillion. Trade in services produced a surplus of $231 billion, whereas trade in goods produced a deficit of $703 billion in 2013. In Q3 2013 the deficit on the nation’s current account was the smallest since Q3 2009, shrinking to $94.8 billion from $96.6 billion in the second quarter of 2013. The Q3 deficit represented 2.2% of GDP. A large current account deficit is a problem that the US economy has faced for over a decade. A huge deficit on the country’s current account makes the national currency extremely sensitive to changes in capital flows.
The United States is the largest trading partner for a number of countries worldwide. This ranking is extremely important, because possible changes in the value of the US dollar will certainly affect the United States’ trading relations with these countries. A weaker national currency would benefit US exports, while a stronger currency would dampen demand for them abroad. According to the CIA World Factbook, in 2012 the main export partners of the United States were Canada ($292.8 billion or 18.9%), Mexico ($216.3 billion or 14%), China ($110.6 billion or 7.2%) and Japan ($70 billion or 4.5%).
At the same time, in 2012 the main import partners of the United States were China ($425.6 billion or 19%), Canada ($324.2 billion or 14.1%), Mexico ($277.7 billion or 12%), Japan ($146.4 billion or 6.4%) and Germany ($108.5 billion or 4.7%).
These rankings are vital, as they also reflect how important the economic development and political stability of these nations are to the United States. If Canada’s economic growth slowed, Canadian demand for US exports would decline, which would have an unfavourable effect on the US economy.
Monetary policy authority – the Federal Reserve Bank
In the United States, the Federal Reserve is responsible for setting and implementing monetary policy through the Federal Open Market Committee (FOMC). The voting members are the seven governors of the Federal Reserve Board and the presidents of five of the 12 district reserve banks. The central bank officials hold eight policy meetings every year, and investors pay very close attention to them for changes in borrowing costs or economic growth forecasts.
To conduct its monetary policy the Federal Reserve uses a number of tools – reserve requirements, open-market operations and the base interest rate (the federal funds rate).
Reserve requirements
The Federal Reserve has set three levels of reserve requirements based on the dollar amount of net transaction accounts held with depository institutions. They are as follows:
– institutions with net transaction accounts totalling less than $12.4 million are required to keep 0% in reserves;
– institutions with total net transaction accounts of between $12.4 million and $79.5 million must keep reserves of 3%;
– institutions holding more than $79.5 million in net transaction accounts are obligated to hold a liquidity ratio of 10%.
Examining the changes that the Federal Reserve has introduced to the exemption amount and the low-reserve tranche over the past 25 years shows that officials steadily increased them at a modest pace in the years before the Lehman Brothers collapse in order to avoid short-term disruptions. Over this period the adjusted ratios had a mixed effect on the total amount of reserves held in the system.
Since the bankruptcy of Lehman Brothers, which marked the beginning of the late-2000s global financial crisis, the Federal Reserve has been raising both the exemption and low-reserve tranche amounts to a much greater extent. These increases have ultimately reduced the overall amount of reserves required in the system by shifting the weight from smaller to larger institutions.
Open market operations
Open-market operations generally refer to actions by a central bank that either increase or decrease the money supply. For more discussion of the effects on the economy caused by these operations and the Fed’s practice in particular, visit our Forex trading guide.
Base interest rate (federal funds rate)
It is the borrowing rate that the Federal Reserve offers to member banks. To avoid excessive inflation the central bank will usually raise its base interest rate, and to stimulate economic growth and consumer spending the Fed will lower it. Changes to the federal funds rate signal major shifts in banks’ monetary policy course and usually have considerable influence on the foreign exchange, stock and fixed-income markets. The statement released by the Federal Reserve is another closely watched event for market participants, as it may hint at future monetary policy actions.