What is Dollarization?

There are many things to learn about the foreign currency exchange, including the important issue of dollarization. In order to understand how it works, FOREX traders must understand the reasons it is used and the history behind it.

Dollarization means that a country uses a foreign currency in preference to their own currency or in parallel to their existing currency. However, it is never applied for the US dollar, only being used to create an alternative national type of currency. In fact, dollarization has become an official and mandated policy in some countries for varied reasons. These include:

• for fiscal discipline promotion

• gaining better stability financially

• lowering inflation

The main economies that use dollarization officially within the FOREX market include El Salvador, Ecuador and Panama. As recently as 2005, the preferred dollarization currencies included the:

• Australian dollar

• Indian rupee

• Swiss franc

• New Zealand dollar

• Euro

• US dollar

However, other independent type states have used the Russian ruble, Israeli shekel and the Turkish lira instead.

In the FOREX market, using dollarization does not have to an official thing. Sometimes private representatives prefer to use another currency instead of their national one. Many will hold out for example type deposits in that other currency as their national currency has a proven track record of problems. Others do this semi-officially, using the biomonetary system, whereby the foreign currency becomes the legal tender of their country instead of their own, though that currency takes second place domestically. Most do it officially, stopping the use of their own currency completely and using only the foreign currency on the FOREX market and for all transactions within their country. In fact, in official dollarization, the adopted foreign currency becomes the legal tender of the adopting country.

Dollarization plays an important role in the workings of the FOREX market. For FOREX traders, looking at the right FOREX indicators when trading in relation to a particular country is important.

Jill Switch is a writer and FOREX trader, whose blog, Value-Exchange, is sharing insights into the amazing world of the FOREX or foreign currency market. She writes about a variety of topics for the site, including:

1. FOREX signals
2. FOREX exchange rate
3. FOREX pips
4. FOREX indicators
5. Foreign currency exchange