Forex Traders Must Know It, All About Dollars
The trading world as we know it provides many options for many speculators. Especially forex trading. We often see “no commission” trading ads, 24-hour market access, huge profit potential and easy simulation of trading through demo accounts.
It is true that the forex market is very wide but also anyone who wants to become a forex trader can fight thousands of professionals who work in Banks and other Financial Institutions. The Forex market is open 24 hours and there is no centralized exchange (OTC).
The forex market is not intended for those who do not have proper preparation and investors must do the analysis beforehand. In particular, the prospective trader needs to understand the economic basis of the major currencies in the market and the unique factors that affect their value.
US Dollar Introduction
So far, the US dollar is the most significant currency in the global market. It is the dominant reserve currency in the world and represents almost half of the major currency trading volumes. The US dollar is also the default currency for most transactions. Given that the US economy is the world’s largest single economy (close to three times China is ranked second). It is not surprising that the US dollar plays the same role.
But based on history, the US dollar does not always hold this position (main). Before World War II, the British pound had as much of the influence and prestige as the current dollar. As the United States dominates the post-war economic region, the significance of the effects of the dollar increases.
The central bank of the United States is the Federal Reserve. Like most central banks, the Federal Reserve is tasked with balancing between boosting economic growth and controlling inflation. But the US federal government bond market complicates the Fed’s task to some extent. Treasury bonds are very popular around the world and are seen as a proxy for risk-free investments.
Interest rates in the United States have been tried to stimulate the economy quite low. But worries about a persistent high budget deficit and an increase in national debt show. The real risk of future interest rate increases. Because of the size of the US economy and the bond market, the actions of the Federal Reserve’s central bank have a disproportionate effect. Yes, disproportionate interest rates throughout the world.
The Economy Behind The US Dollar
Even though the US economy is the largest in the world. However, much of the world’s focus is on post-housing bubbles, the cause of the global crisis. Need for reform in the fields of Social Security, Medicare, Medicaid, and debt repayment. These all create potential significant problems for the US economy and pose a threat to the economy.
The United States also promotes a service-based economy. While the US has the largest economy in the world. But the value of the US is in third place, behind China and Germany. Much has been done in the manufacturing sector by “leaving” the US. As well as more and more companies to take advantage of lower wages and costs. America is still a leader in technology, financial services, and media, and the US economy is increasingly relying on this industry as a source of competitive advantage.
Factors that Influence the Dollar
There are many models and theories that try to predict exchange rates based on relative interest rates, price levels, and so on. These models do not function properly and consider many factors. That is in buying and selling decisions and the momentum of speculation can affect exchange rates (market psychology). In other words, currencies are like other “products” with excess supply and prices are determined by changes in demand.
While demand for the US dollar plays a major role in global trade (trading partners need to sell dollars to do business). The dollar value is also strongly influenced by economic data.
Data that makes the US economy look stronger can be positive for the dollar and vice versa. Although influenced by inflation expectations. Therefore, traders need to pay attention to the release of scheduled economic data such as GDP, Trade Balance, inflation and so on. This data comes from free and online numbers, both consensus analyst estimates and actual values.
The US dollar is also unusual driven by global events, good and bad. History has shown that the dollar tends to strengthen in times of global tourism. That is like war, political instability or economic instability. Conversely, when global conditions appear more peaceful and optimistic. Traders tend to focus more on the relative health of the US economy and seek diversification of the dollar.