The United States Dollar (USD) is by far the most traded currency in the world.
In Forex markets, the seven most traded currency pairs are all USD pairs.
As such, having a working knowledge of what makes the Dollar tick, will help you capture some pips.
We won’t go over bullshit such as bill denominations, history and other unimportant crap like that.
So hold your seat cowboy.
Straight for the kill.
The United States Dollar, like every other currency appreciates (goes up) or depreciates (goes down) based on supply and demand.
As we explained in Forex economics, demand comes from many, many sources, and thus, it’s harder to pinpoint.
On the other hand, supply of USD is managed by the Central Bank of the United States, the Fed.
Therefore, keeping an eye on the Fed’s moves, and anticipating them, will yield you the best trading opportunities since Fed rate decisions move USD price.
Thus, each currency’s Central Bank has a very strong say on that currency’s price.
Is that it?
Each currency is attached to a unique economy.
And that economy’s characteristics can yield other trading opportunities.
In the case of the United States Dollar, demand is influenced by risk tone in the markets.
Since the American stock market is so prominent, investors from all over the world seek to profit by participating in it.
But to do so, they have to sell their currencies in exchange for United States Dollars.
Thus, demand for USD increases.
This explains why, sometimes, when stock markets are doing very well, the USD strengthens.
On the other hand, when geopolitical risks arise, and investors seek to decrease their exposure, USD falls since many risky positions (stocks) are closed.
This is usually called a safe haven flow. Since money flows from USD and other risk-appetite currencies to secure or safe currencies like JPY and CHF.
So we know USD price depends on supply and demand.
And we also know interest rate decisions by the Fed heavily affects supply (thus, traders and investors anticipate this and shift their demand accordingly).
But we also know about risk-appetite-driven demand by foreign investors (foreign to the US, that is).
There are other, less frequent movers, but we should focus on these.
Best way to make pips consistently? Pay attention to the Fed, which economic indicators the Fed is paying most attention to, and what the market cares about.
In other words, does the market believe what the Fed is saying?
If the Fed says it cares about inflation, and the markets believe them, then a strong or very weak CPI release will shake USD price.
Note: a currency’s price is always quoted in another currency. This means price won’t budge unless one currency is weak while the other is strong.
If both currencies in a pair rise (or depreciate) in more or less the same amount, the currency pair won’t move much, if at all.
End of note.
But as we’ve mentioned relentlessly, many data releases can move the markets when the Central Bank and traders care about it.
So don’t stick to those three, since they won’t always shake things up, and other, often less important data can impact things under specific circumstances.
Risk-on and risk-off sentiment is hard to anticipate. Both when it occurs, and when it starts to unwind.
However, once it happens, if its strong enough, you can take advantage of it for a session, while keeping an eye out in case it begins to undo.
From experience, it’s much easier to sell USD against safe haven currencies when risk-off occurs, than it is to long USD when risk-appetite is strong.
Because the flight to safety often occurs suddenly, and massively as a response to specific events (like North Korea threatening to launch a nuclear bomb).
Thus, the combined effect of timing and volume makes the safe haven flow much more practical to trade.
In other words, trading a load-up on USD isn’t as clear an opportunity to long USD.
I think that’s enough for now.
See you later.
The Forex Economist
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