US Dollar Soars on Higher Yields and Bank of England’s No-Go Zoop! This is interesting, especially when you consider the US is pumping unlimited amounts of money into the economy via quantitative easing. The British have had a tough go of it over the last decade or so, dealing with low interest rates, double digit inflation, deflation, stagflation and record high unemployment. Interestingly enough the Bank of England has been forced to announce that it will not be keeping interest rates on hold, and that they are going to keep rates on deposit for an undisclosed period of time. One question then arises, where does this leave the American Dollar? In this article we will examine exactly how this plays into the Dollar’s recent uptrend, and why you should be watching the move with vigor…
In the United States we have always had low interest rates. However, over time as the US economy has grown the fed has certainly felt the need to stimulate growth in the economy with higher interest rates to get the spending back to a level which is acceptable to the consumer, business and investors. For the most part this has worked as long as economic activity has been robust, but now the BoE has thrown a spanner into the works. We are now witnessing a sharp pick up in dollar exchange rates as investors panic to get rid of dollar denominated assets as the fed rate hike is perceived to be coming.
Now the US Dollar is no longer seen as a safe haven, and investors fear that any move by the US central bank to reduce rates will send shock waves through international capital markets. This in turn will do significant damage to the US economic outlook, and derail its recovery. If you are an American investor who has been thinking about entering the currency markets, now is the time to jump in. In the last decade we have seen unprecedented levels of foreclosures, and we are now experiencing a slower than expected growth in the economy, and rising unemployment. These circumstances do not bode well for the US Dollar. And unless something drastic happens the US Dollar is very likely to continue its relentless move upwards.
It is easy to understand why so many people, especially with the risk of losing their life savings, are reluctant to invest in the US Dollar. But don’t let greed get the better of your well-being. The economic situation will improve eventually and you will make money if you buy now while the prices are low. In the meantime you can enjoy the fact that a lot of people are selling off their dollars for the very same reason – higher yields.
If you think that the Fed will keep rates on hold forever then you will soon find yourself disillusioned, as history and experience has taught us that it is a never-ending battle to maintain market share and maintain a competitive advantage in the global markets. Markets will inevitably find their own level of comfort and stability. That is how they always are. So when you hear about charts where the US Dollar is trading higher or lower than the Euro, or Japanese Yen or British Pound then pay close attention. This is the global economic equivalent of a stock market phenomenon where investors scramble to buy a stock or investment because it has reached a new high or new low.
It could also be an indication that another economic indicator, say the unexpected rate increase in China, will be followed by a rapid increase in the US Dollar. Another indicator is the slowing in the growth of India’s economy. These factors all suggest that the US Dollar will be driven down further. However the fact that the US Dollar has already strengthened against its major international currencies does not necessarily mean that it is going to make a huge run. Remember history is made on the trade exchanges, not on the exchanges themselves. It is what you do on the exchanges that decides whether the US Dollar is going to make a big move higher or lower in the coming days and weeks.
You need to know when the US Dollar is undervalued versus its major economic indicators and get ready to trade the US Dollar if you see that it is about to take a dive. If you have bought the US Dollar already then you might want to wait for the price to bottom out before you unload it. This way you will be able to ride out the dive in the Dollar and ride out the strong US Dollar versus the other currencies as the US Dollar begins to trade back towards its base.
If you wait until you see the price dip to below the major economic indicators then it is best to hang onto your US Dollar because once it starts to rise again the US Dollar will be more vulnerable. You might want to sell all of your US Dollars immediately and buy more Asian Stocks because the US Dollar will likely not hold its ground against the South Korean Won or the Japanese Yen. If you are really smart you will use the time between now and the end of the month to do some technical analysis and research in the various economic indicators that you need to know before you trade your US Dollar. While most of the traders who do technical analysis will look at the Stochastics, the Butterflies and the RSI etc.