Overnight, world stock markets sold off as once again as Greece had their debt downgraded by S&P. As a result, EUR/USD is down 1.27% as mounting fears of debt default or a material change in the composition of the Euro is putting pressure on the region. The Euro is near a 3-month low at 1.435.
Also, UK retail sales “unexpectedly” fell in November. This has sent the British pound to a 2-month low vs. the US dollar. As of 9AM EST, GBP/USD is -1.44% to 1.61.
As I mentioned yesterday, the Fed really doesn’t need to do anything about interest rates to see dollar strength. As long as there are potential economic problems somewhere in the world, the flight to safety trade will cause investors to return to the US dollar. The forces of supply and demand then take over and the dollar rises as demand goes up.
In addition, the Aussie is also down 1.56% vs. USD, again high-lighting the risk aversion trade. And even though I’m in love with the Aussie and want to move there because of the way they run their economy LOL, I am a trader at heart and I do what the market tells me– rather than what I think should happen.
So, if the problems in the Euro zone aren’t dealt with soon, we will continue to see US dollar strength. This means no Aussie trades for me, even though I’d love to have the carry interest.
One last thing I want to mention. A lot of investors ask me, ” well if the dollar strengthens, isn’t that good for me? I hold US dollars in my bank account.”
Well, the answer is two-fold.
1) yes it can be helpful as it increases your purchasing power for foreign goods and services. But it does nothing to help you domestic purchasing power– unless of course merchants pass those savings along to the consumer, (which they won’t do unless they have to).
2) You won’t actually see monetary gains unless you trade dollars against other currencies. This involves the forex market. Many investors are afraid of this market and they shouldn’t be– as there are tremendous gains to be made.
To learn more about how you can get involved with this market, please check out our currency trading courses!
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