3.26.2009

Dollar Stalled By Threat to Its Reserve Currency Status

The Economy And The Credit Market

Last week, dollar traders and the broader market were surprised to see the Fed officially announce its intentions to buy Treasuries and double its purchases of mortgaged backed securities. This week, concern over the health of the US currency is far greater. Not only is the US economy ailing and its fiscal deficits ballooning; but now there are concerns that the world may eventually vote to replace the dollar as the world’s reserve currency with a basket or what China has called a ‘super-sovereign reserve currency.’ As the world’s largest holder of US Treasuries, their concerns are taken seriously; but this is an issue that has been made even more pressing by the fact that Russia and UN among others have voiced similar opinions. US President Obama, Treasury Secretary Geithner and the Fed’s Bernanke have all brushed off concerns over the dollar’s health and suitability; but this is no doubt going to be a topic brought up at next week’s G-20 meeting. Considering the group’s history of inaction however, the likelihood that such a drastic shift will be adopted is low.

A Closer Look At Financial And Consumer Conditions

Investor sentiment has improved rather rapidly over the past week; but the overall health of the financial markets is still in the doldrums. As the risk of protectionism rises and calls from economic leaders to other economic leaders to do more grow louder, the global nature of the financial and economic crisis has manifested itself. Recently, the US has taken its major counterparts to task for not increasing their efforts to brace their own economies; to which many respondents have suggested America is digging itself into a hole. Regardless of which side is correct, it is starting to look more and more like the US, China and UK are expected to take the lead for reviving the world.

As debate over the dollar’s role as a safe haven and reserve currency, the limits to US bailout efforts and the feasibility of sentiment in the financial markets rage on; the world’s largest economy is still dealing with what is likely its worst recession since the Great Depression and probably one of the worst contractions in the industrialized world. Over the past week, second tier data has started to hint at stabilization. Both factory orders and housing sales have shown significant improvements; but this comes within the worst trends on recent record. Until employment, consumer spending, mortgage approvals and construction improve, the trend is still down.

The Financial And Capital Markets

Capital markets have extended their biggest rally in months (and for some asset classes it has been the biggest rebound in years). Such an incredible rally has obvious led many market participants to question whether this is the sign of a genuine recovery that so many have been waiting for. However, when searching out a true source for investor confidence, there are few leads that promise to snuff out risk and revive expected returns. A frank assessment of the global economy leads us to a severe recession that is likely to grow worse before it improves. Hope for returns through increased fixed investment, rise in production (by way of demand), and an influx of capital into the markets is fleeting at this point. The most poignant factor for the health of the capital markets is investor confidence. Even if growth recovers and business revenues pick up; the bear market to this point has wiped out significant levels of capital and changed market dynamics permanently.

A Closer Look At Market Conditions

It is a common saying that there are rallies in a bear market. This is the adage to keep in the back of our minds as both the equity and commodity markets extend their aggressive rebounds. The surge in stocks has been particularly bold; so it stands to reason to be especially cautious. The S&P 500 is working on its best monthly performance since 1991 despite expectations for the US recession to deepen and obvious problems with global policy makers establishing a coordinated plan to turning the recession and financial crisis around. A rebound in commodities is more encouraging as its speculative interest is lower; but it still does not confirm a true recovery.

Though it is still uneven, risk trends are showing additional signs of improvement. Over the past week, there was a sharp drop in credit default swaps that can be attributed to the Fed’s announcement that it was doubling is purchases of mortgage-derived securities, additional details on the US plan for a joint public/private fund to purchase toxic assets by Treasury Secretary Geithner and the progress for a clearing house to be established for the otherwise frozen CDS market. However, these are all plans that could take some time to actually implement and take effect. In the meantime, recessions are worsening, global bickering is ongoing and credit-related institutions are failing.

Written by John Kicklighter, Currency Strategist
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.


The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.

Currencies

Currencies
List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!