BRITAIN IS in the grip of an election and yet traders in the foreign exchange market are doing the sensible thing and ignoring T Blair and M Howard in favour of a keen interest in the US Dollar.
America is such an important world economy that, whatever happens over there will always have a direct impact over here. And when I say ‘over here’ I mean Great Britain and Europe. The extraordinarily weak US Dollar, driven by the huge trade gap in America and concerns over the struggle for growth in the US, has allowed the Euro and Sterling to stride to undeserved levels of strength.
Based on fundamentals, the Euro has no right to be buying http://www..30 but the negative US Dollar mood in the markets is causing a rosy coloured view of the Eurozone. How a group of countries that has such high unemployment, such low economic growth and such slow retail sales growth, should have a currency that dominates the global trade, confounds me. However, when you look at what drives the Forex market – international speculative funds – things become a little clearer. The fact is, that when the US Dollar is popular, the Euro, Swiss Franc, gold and other speculative trading items are weak.
Sadly for the USD, high oil prices, the $61 billion US trade gap and slowing economic growth in the US have all conspired to hammer the USD into the ground. As traders have downgraded their view of the prospects for US interest rate rises, they have reduced their holdings of US Dollar and looked for other avenues to make money with their funds. The Euro has been a target as it is one of the few economies that actually boasts a trade balance surplus. Other currencies that have benefited have included the Australian and New Zealand Dollars where higher commodity prices have added to their strength.
Traders have been joined in their abandonment of the US Dollar by Asian central banks who have been very vocal in their plans to reduce the amount of Dollars they hold in their reserve funds. Clearly, with the dominance that the USD has held over the markets ever since the 2nd World War, the Dollar reserves held in such funds are massive and a flood of them hitting the market would devalue the Dollar fatally. There cannot be a circumstance under which these central banks would do such a dramatic thing but their plans to leak Dollars into the market at a measured pace would increase supply levels in the manner of the tide level rising as the icecap melts and the effect would be almost as devastating.
But, before I get totally carried away with the prospects for Dollar meltdown, might I add a word of caution. The markets are very focussed upon the prospects for the US economy as I have said. In the expectation that the Dollar is going to decline further, they have almost unanimously sold Dollars ahead of time on the basis that traders ‘buy the rumour and sell the fact’. Therefore, how many more dollars can they sell? What generally happens when everyone is expecting bad news is that, upon the first jot of good news, speculators take their profit and the market does exactly the opposite to the general expectation. This is why on the 21 April, a slight up-turn in US inflation, allowed the GBPUSD exchange rate to drop from http://www..9220 to http://www..9010 in a matter of an hour.
Such moves are far more common than most casual observers would believe as those who do not trade inside the market will tend to see the opening rate each day and note the variation from the day before. They miss the rise and fall that can amount to two per cent up and down in a single day. It’s that movement that I use to save my clients a lot of money when they are moving funds from the UK to Europe, to America, to Australasia and elsewhere around the globe.
Forex trading isn’t generally as complicated as witchcraft, water diving and alchemy, although we have our moments. It has far more to do with patiently listening to what everyone is telling you, absorbing the rhetoric in all its detail and then rigorously ignoring most of it, making a totally unemotional judgement. Single mindedness has its advantages.
David Johnson is a currency dealer with Halo Financial Ltd, helping private clients to save money when transferring their funds around the world for property purchases, migration and other capital expenditure.
