When it comes to online currency trading, and indeed the global economy, few currencies are as significant as the US Dollar.
Given this influential role then, it is of little surprise that the major focus of forex traders is within the USD markets. US Dollar currency pairs make up a huge proportion of all major pairings and much of the overall forex trade.
Regardless of the US Dollar strength, these markets are where the bulk of major trading occurs, and with that comes inevitable opportunities.
Impact of a Strong Dollar on Industry
According to a research of Forex and CFD’s broker TradeFW.com, the strong dollar, as it currently is, has the ability to divide opinion as to whether it produces a positive or negative economic impact. The truth for industry is, it really depends on the focus of the particular sector. This will naturally have a knock-on impact on the global forex market which may require an adjustment of your trading strategy.
In the broader sense, industries which rely heavily on exports will suffer as the cost of good in US Dollars overseas increases.
This makes it more expensive for countries to import US goods and there is a general downturn in areas such as the car industry.
This will be a factor to consider if your trading broker offers markets in commodities, indices, or stock trading, as many do.
Whilst exporting and industries which are heavy on exports will likely suffer negative impact from a strong dollar, domestic and import-centric industries will be welcoming of a strong USD.
This makes imports effectively cheaper and strengthens the domestic based economy. Forex traders should be aware of these situations and enact a trading strategy which can see positive returns whether the currency is strong or weak.
Monitoring the USD Position as a Trader
When forex trading with USD pairings, it is of course vital to constantly monitor the markets for possible movements. Any online broker you engage with should provide you with a variety of tools through which to accomplish this.
This monitoring begins with basic charting tools to conduct technical analysis, and also engaging with the relevant indicators to gauge the market sentiment.
Sentimental analysis provides another key when interpreting currency trading movements.
For both new and experienced forex traders, keeping a close eye on USD and other market levels, begins with features as simple as your economic calendar, and live news feed.
These are simple tools which can make a big difference, and are almost always incorporated with popular online trading platforms.
Beyond this, use of some basic technical indicators to conduct a simple technical analysis, can provide great insight into the markets current position and possible movements.
Again, these technical tools are provided by the best trading platforms, and can be something as simple as a Fibonacci Retracement or RSI to help indicate the strength of the market.
Trading Strategies to Benefit from a Strong USD
As mentioned, when the USD is strong, exports will become relatively more expensive, with imports moving in the opposite direction. From a fundamental point of view, a long-term positions are generally the ones which can benefit most from strong currency.
The first strategy you could engage as a beginner is to start trading in longer positions, also ensuring to seek out the strong/weak pairing combinations.
On a more advanced level, as well as long-term holding positions, experienced traders usually target domestically strong Exchange Traded Funds (ETFs), or those which have a strong foundation in exporting from overseas to the United States.
This is the case, since the US Dollar will be worth more, exports to the US should increase.
Domestically, a strong USD is also indicative of a strong economy, and thus, US consumers should have more money to spend, boosting domestic companies.
Recommended ETFs in the case of a strong dollar include, Invesco PowerShares U.S. Dollar Index Bullish Fund (UUP). These are good options for a long-term hold and can also pay interest over time. With a strong currency, it should also be easier to buy dips and trust in the trending market.
Perhaps the most vital part of your trading strategy in a strong USD market actually begins prior to trading. Through choosing the best forex broker, you can be assured of having access to all of the described professional tool and charting instrument as well as a range of educational materials to ensure you are fully prepared when trading.
As is the case in the current market, the USD often finds itself in a position of strength. This is one of the reasons it is the global reserve currency.
For those engaged in forex trading, particularly short-term, a strong USD can be problematic, though as we have highlighted, the issue is two-sided.
Ultimately, those who are willing to exercise patience and closely follow market sentiment, can find opportunity in forex currency trading regardless of USD strength.