Anyone who’s involved in Forex Trading has seen the Dollar lose value against most major (and minor) currencies in the last few weeks. The decline has been swift, impressive, and no one really knows when it’s going to stop. Those who traded against the dollar ended up with nice gains. Those who stayed with the dollar… I can only hope they got out of their position on time.
The big question on everyone’s mind is when this decline is going to stop. As I said, no one knows for sure (and those who say they do are just anxious to get your attention or sell you something) but I can venture up at least 4 reasons why the Dollar may continue to lose value in the near future:
1. There’s too many dollars around – The Federal Reserve has simply printed too many dollars. The various stimulus plans (or is it stimuli?) have pumped a lot of money into the American economy. Since we live in a globalized system, this can’t but make the dollar less valuable. The basic rules of supply and demand are true for Forex as well: the more supply you have, the lower the price of something goes.
2. Increase in demand for commodities – When the credit crunch hit, the prices of commodities dropped like a rock. This has changed in the last few months and oil is just part of the story. The connection between the price of commodities and the USD is well known. Usually, when Commodities increase in value, the dollar decreases.
3. In many countries, the Export-Import ratio with the US is in favor of Export, this means that most countries sell more to the US than they buy from it. This means that more dollars are coming in to world wide economies than those being spend. These dollars are then converted to local currencies, a process which causes the value of the USD to drop even further.
4. The appetite for risk has reared its ugly head again and no one can say if it’s too early. However, with rising stock markets, the desire for high and fast profits is once again powerful. The USD was seen as a shelter in times of crisis. Now, it is being escaped from.
Let me make it plain that I don’t know for sure for how long this process will go on. However, the tide seems to have turned against the US dollar… at least for the time being.
Happy trading.
