This Made The Dollar Less Attractive On A Yield Basis

Category: Finance, Currency Trading.

You have heard that currency trading is a quick way to financial freedom.

Maybe you can but first read about the past three weeks in the forex market. You see stories about the billions, of dollars traded, no trillions each day and think you can do this, no problem. January 2008 was a interesting month for currency traders. Lending institutions were taking huge writedowns for bad real estate loans. The Housing market was teetering on collapse. Brokerage firms and banks had recently fired their CEOs because of excessive losses in their Mortgage Trading units.

Measures of consumer confidence were at levels not seen since the early nineties. The US equity markets were falling. And to top it off the initial report for US employment released in January for December of 2007 showed that the US economy had added only 18, a miniscule number, 000 jobs. To combat this bad news the US Federal Reserve, which had already cut short term interest rates one hundred basis points in the past four months, cut Fed fund rates another 125 basis points in January alone. Recession was on virtually every economist and Forex traders lips. This included a mid meeting cut of 75 basis points on January 22, the first time that serious an action had been taken since September 17, 2001 which was necessitated by the concern of possible financial fallout from the September 11 attacks.

It lends itself to purchasing fewer big ticket items like furniture, washing machines etc. and less services like landscaping and painting etc. Also, consider that the multiplier effects on the economy of poor housing data is truly compelling. Reduced consumer confidence means less consumer spending thereby not putting money to work in the economy. And of course fewer jobs created needs little or no explanation. A consumer nervous about his or her finances spends less money. It seemed as if a perfect storm had brewed for the US economy.

He or she is going to sell US dollars right? So what is a seasoned currency trader going to do given all this fundamental information? After all, the Fed had reduced interest rates 225 basis points in five moths. Furthermore, fixed income markets through the Fed Funds futures contract had priced in an additional 100 basis points of rate cuts out to December of 200As every good forex trader knows, currency forward dealers will take this into account when rolling your positions. This made the dollar less attractive on a yield basis. Plus, given all the poor economic data, selling the dollar seemed like a sure thing.

It is February 19 as I write this. Well as the man said, other than death and taxes, there are no sure things. On January 29, the night before the last rate cut by the Fed, the Euro closed at 4775 against the US dollar and the Japanese Yen closed at 101As I write this three weeks later, the Euro is trading 4740 and the Yen is at 105Virtually unchanged from three weeks ago. So What happened? All this in spite of worse economic news being released in February. To start, currency markets might be rewarding countries that take swift action to cure what ails them instead of punishing them. So that is a factor.

For example, in addition to the monetary easing, the US has added a 150 billion dollar fiscal stimulus package. Secondly, both the Euro and the Japanese Yen have already gained almost eleven percent against the US dollar since mid summer of 200Also there are signs from recent economic data in Europe that growth may be slowing and that rate cuts might be in the offing. So maybe the move is over? The UK has already eased. Looking at the long term technical charts it is not over yet. This proves that currency trading is not just about buy or sell and take your profits and go home.

But how much money are you willing to risk in case you are wrong? It involves careful economic and technical analysis, discipline and most, risk control of all your time. Forex trading has its rewards but they do not come easily.

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