Doom for the Dollar?
Earlier this week, Richmond Fed President Jeffrey Lacker made an announcement signalling that U.S inflation is likely to ‘accelerate’ over coming years, following a sluggish period after the 2007-2009 recession.
Speaking at the Global Interdependence Center’s Central Banking Series conference in Paris this week, Lacker forecast that inflation would be close to 2 percent by 2017, “despite low recent inflation readings, FOMC (Federal Open Market Committee) participants generally expect that inflation will rise back toward 2 percent over the medium term”.
He continued to speculate that this would mean that interest rate hikes were likely to occur in two or three small increments, over a similar period of time. The dovish announcements from Lacker and other Fed members fuelled speculation that the dollar would suffer; be softer, less volatile and that Forex investors may seek to trade currencies that offered higher yields.
In addition to this, more downward pressure has recently been exerted on the dollar by the recovery of the AUD, CAD and NZD, who have been bolstered by the surge in the price of oil and by unexpected appreciations in the price of the EUR.
So How Does All This Work?
If interest rates rise, then this would be likely to attract foreign investment and, in turn, this inflates the value of the dollar. If interest rates remain low, however, then foreign investment is less likely and the value of the dollar would likely fall.
Other factors also feed into this equation and in particular inflation rates. Higher interest rates can mean that the rate of inflation rises also and this generally leads to a decrease in the value of the dollar. Striking a good balance between the rate of inflation and interest rates is key to ensuring that the dollar remains strong and can hold its own on the Forex markets.
It is important to consider that these rules only apply verbatim, if all other factors are equal, that is to say, if all countries are participating on a level playing field and of course this is not the case and world economics and politics all serve to make the overall picture less clear.
What Can Small, Independent Investors Do?
For small, independent investors who wish to trade on the Forex markets, the sheer pace at which the economical climate can change and the array of factors that need to be taken into account, can be a little bewildering and make it difficult to pinpoint trades that will result in profit. Traders who are most successful, will achieve that success by investigating a number of avenues. A reliable trading platform, such as, ETX Capital is a good place to start, this will allow the trader to access many trading instruments, including Forex, but it doesn’t end there. Users will also be privy to a host of advice and information that will help them trade with confidence.
Further to this, traders need to have their eye on the world economic window, setting up news feeds that are fast and reliable. Social media can play a vital role in this, as can regular visits to websites such as The New York Times. Research is paramount, as is an in depth understanding of how Forex markets react to breaking news and events.
Another way to optimise the chances of success is for Forex traders to develop a disciplined trading strategy and to hone their technical skills. Accurate chart reading is an essential ingredient in any traders recipe for profit, as is using a strategy that includes things like stop loss orders.
So is it Really Doom for the Dollar?
In short the answer is no. The dollar did suffer a 1 percent loss against some major currencies after the announcements from Lacker, however it picked up again after only a two day sell off. Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey, was quoted as saying: “It looks to me like we have dissipated the dollar weakness from the Fed”. This is perhaps, in part, because the U.S is currently enjoying low unemployment and because improving domestic household finances are fuelling family spending, facts echoed by Atlanta Fed President Dennis Lockhart, who said: “Short of some big shock that turns consumer psychology on its head, I see no reason why consumer spending growth should not continue. I think the conditions supporting this engine of economic momentum are likely to hold steady”.
World Economic Stage
It is not only domestic economic conditions in the U.S that are supporting the dollar, uncertainty regarding global economics; concerns over conflicts in the British Conservative Party and the upcoming referendum on leaving the European Union (Britex) have triggered a slide in the strength of sterling. The on going slowdown of the Chinese economy, the pressure being felt throughout Europe in the face of the conflict in Syria and the humanitarian problems that are being caused as a result are just some of the factors that are worth bearing in mind. Germany has Europe’s strongest economy, but even it has strained under the weight of the influx of refugees fleeing to seek asylum in Europe. The world stage is far from stable and it is possible that in terms of Forex, Europe in particular may see some of its players exit stage left.
With the dollar currently looking only a little bullish in the medium term, Forex investors would be advised to take a cautious approach to investing in it. The Fed’s policy outlook is still far from set in stone and there is market scepticism regarding whether interest rate hikes will actually materialise. It is possible that inflation will rise without the accompanying interest rate rises needed to balance this. Furthermore there is still a risk that the domestic economy will slow down and recession will, once again, rear its ugly head. But let us not forget that ‘there is more than one way to skin a cat’ and traders are not obliged to adopt a bullish approach to Forex investing. One man’s loss, can be, another man’s gain and if the tables turn bearish, going short, may be a profitable consolation.