US Dollar Pivots – The current path of the US Dollar is lower than many expected and traders are watching the moves. Forex markets around the globe are watching the moves in the US Dollar, and the reactions are not good. In fact, the FOMC may have some unanticipated action up their sleeve to help raise rates as the dollar continues to weaken. As the path continues on this path, it’s looking like the US Dollar may even continue on this path.
In fact, a strong currency can help you make money if you’re already in the market for investing or trading. Strong currencies mean stronger interest rates, which translates into more buying power for you. And that means more money for you. The last thing you want is weaker dollars on top of this trend, which can be detrimental to your long term health and prosperity.
The current path of the US Dollar can be traced back to July of 2008. At that time the Chinese stopped trading with the US dollar and this created bad press for the US Dollar. This created a domino effect, and it sent shock waves all across Wall Street and the Financial System. The Asian economic crisis combined with the Great Recession as well as the housing implosion were big drivers of these trends.
Traders scrambled to determine which currency would act as a buffer between the two and the inevitable collapse of the American Dollar. Ultimately, the Chinese stayed on the sidelines and waited for the US Dollar to weaken further, which it did. When this happened the Chinese had to turn to the other major currency markets to borrow money to cover their losses and this led to the Asian economic crisis. This has played itself out in the US Dollar, making it lower than it was when the Chinese started their move. So the domino effect moved from the US Dollar to all of the currency markets worldwide.
As you can see the basic lesson here is that the simple decision of reducing the size of the balance sheet too quickly can cause a global financial crisis. And it is exactly this type of move that the FOMC is trying to avoid right now. They do have the tools to prevent this type of move, but as history has shown they tend to get it wrong most of the time. They also are forced to make these types of moves when they are about to lose too much money, which is not good for their overall health.
But as the US Dollar continues on this downward path, this is the type of move that they do not want to make. For them, this is the equivalent of letting the cat out of the bag and admitting that the US Dollar will continue to strengthen versus the Euro or Japanese Yen. And if the EUR/USD goes up, then they have priced themselves too high and are unable to take that loss.
It is true that the EUR/USD might fall as much as 10% versus the USD at any given moment in time. This would cause a significant sell off in the markets and send shock waves through the global economy. However, if the central bank takes the proper stance, they could prevent this type of move without having to endure a major loss of confidence in the markets. In fact, if they act in a way that will support the currency over the long term and allow it to stabilize as the market begins to correct, then they will have done a very prudent move.
For many years, the EUR/USD has been considered a strong currency against the US Dollar. Recently, however, many economic reports have shown that the EUR/USD may be vulnerable in relation to economic reports. If the central bank does proceed with this type of policy, they will have set the stage for a major currency tradeoff that will benefit the Euro and the US Dollar. If you think that a US Federal Reserve decision to raise interest rates will prompt European central banks to increase their own currency, then you may be right. It is possible that this move will be the catalyst for European integration, but it is also possible that this won’t happen until after the United States has raised its interest rates and Europe feels like they need to respond.