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 basics 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 were quite low during the credit crisis as the Federal Reserve tried to stimulate the economy, but concerns about a persistent high budget deficit and growing national debt show a real risk of higher interest rates in the future. Due to the size of the US economy and its bond markets, the Federal Reserve’s central bank action can have a disproportionate effect on interest rates around the world.
The Economy Behind The US Dollar
Despite the economy of the U.S. is the largest in the world, much of the world’s focus is on post-housing bubble, the cause of the global crisis. It needs reforms in the areas of Social Security, Medicare, Medicaid and debt servicing. This all creates significant potential problems for the US economy and poses a threat to the economy.
The United States is also improving service-based economies. While the US has the largest economy in the world, but the value of US exports are in third position, behind China and Germany. Much has been done in the manufacturing sector by “out” the US, as more and more companies are producing outside of the US to take advantage of lower wages and costs. America is still a leader in technology, financial services and media, and the US economy increasingly relies on this industry as a source of competitive advantage.
Influential Factors Against the Dollar
There are many models and theories that try to predict exchange rates based on relative interest rates, price levels, and so forth. These models do not work well in practice, as traders consider many factors in their buy and sell buy decisions and the momentum of speculation itself can affect the exchange rate (market psychology). In other words, currencies like other “products” with excess supply and prices are determined by demand changes.
While demand for the US dollar must have been influenced by its major role in global trade (trade counterparties need to buy or sell dollars to do business), the value of the dollar is also heavily influenced by economic data.
The data that makes the US economy look stronger can be positive for the dollar and vice versa, although some are influenced by inflation expectations (growth is good but excessive growth can be a threat). Therefore, traders need to pay close attention to the release of scheduled economic data such as GDP, Trade Balance, inflation and so on. This data comes out periodically and traders can find these numbers freely on the internet, 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 turmoil, such as 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.