The decision of of whether to buy or sell dollars all depends on how the economy is performing. Investors from all over the world are are attracted towards a strong economy and the reason behind that is the perceived safety and the ability to achieve an acceptable rate of return on investment. Investors are always looking for the highest yield that is predictable or “safe.” Investment from other countries creates a strong capital account and this in turn results into high demand for dollars.
Factors Affecting Dollar Value
When we are talking about taking a position in the dollar, then it is important for the currency trader to assess the different factors that affect the value of the dollar so that the trader may be able to determine a direction or trend. We can divide that methodology into three groups as follows:
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Supply and demand factors
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Sentiment and market psychology
Here I will discuss all three of them one by one.
Supply and Demand for Dollars
We create a demand for dollars whenever we export our products or services, this is due to the reason that to pay for our goods and services in dollars our customers are required to convert their local currency into dollars. Hence in order to buy dollars they have to sell their currency to make payments.
Moreover, bonds are issued by the U.S. government or large American corporations for raising capital. If the foreigners buy these bonds then again the bonds have to be paid for in dollars and due to this the customer will have to sell their local currency for buying dollars for making payment.
So the more efforts are made by the US companies to increase their productivity the more foreigners will be attracted towards them for investing in these companies. This will in turn force them to sell their currency for buying Dollars.
Sentiment and Market Psychology
This factors mostly effects the dollar position. If the U.S. economy weakens and consumption slows due to increasing unemployment. Then the possibility increases that foreigners may sell their bonds or stocks for returning the cash from the sale in order to get back to their local currency. Hence they would sell the dollars and buy back their local currency.
Technical Factors
Being a trader one has to gauge that whether the supply of dollars will be greater or less than the demand for dollars. In order to determine this, the trader has to keep an eye at various news and event items, such as the release by the government of various statistics, for example payroll data, GDP data, and other market and economy measuring information. As these are the factors that can help us to to determine that how is the economy performing currently and whether it is strengthening or weakening.
Additionally, it is important for a trader to determine the general sentiment regarding what the players in the market think the outcome of events is likely to be. Mostly this happens that instead of the fundamentals of supply and demand, sentiments will drive the market. Besides the measurement of supply and demand factors and sentiment, other things that the traders have to watch closely are the historical patterns generated by seasonal factors, support and resistance levels, technical indicators and so on. It is believed by several traders that these patterns are repetitive in nature and therefore they can be used to predict future movements. It is just that a proper study of all these factors is required.
Dollar Index
The last thing that I think is necessary to mention here is the the Dollar Index chart. It is the Index that tracks the dollar position against major currency. It provides an overview of how the dollar fares against the other currencies in the index. A trader could be able to develop a big picture sense of the flow of dollars by closely watching the patterns on the chart and listening to the sentiment in the market, as well as monitoring the major fundamental factors that affect supply and demand, and thus by doing this the trader can develop an insight to choose profitable positions in future trades.
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Posted by R. MAK. in Forex trading · 0 Comment
