There is the possibility that as the Federal Reserve and European Central Bank continue to expand their economies and engage in monetary stimulus via quantitative easing or quantitative capital inflows, we will see a renewed bout of forex capital outflows. There are a number of reasons for this. First and foremost is that the Fed and ECB are trying to drive down interest rates while simultaneously hiking short term interest rates. This means a more expensive environment for investors to borrow. This in turn has already led to a spike in the rates of U.S. money market funds (MFs) (the bond fund that borrows dollars and manages them). As interest rates fall, it should result in a larger flow of capital across the Atlantic and into the currency markets. We already saw a spike in capital outflows last month. For instance, in early February the Swiss Central Bank moved its interest rates back down to a record low but the U.S. Federal Reserve and European Central Bank increased benchmark rates to record levels.
Of course all of this is speculative at this point, just to get a handle on where the market will take these movements. This is particularly true for dollar forex, where forex markets can be a little unreliable in terms of future trends. Also, while the dollar isn’t being attacked from any quarter, there is still a pretty significant price decline underway.
Here is an example of dollar strength from one of the market’s greatest traders. This trader is a veteran, with a significant portfolio of dollar forex and currency pairs. In May, I would say he had a pretty good track record and was buying when the dollar was weaker. It has since weakened steadily but is still high. That is also when I began putting more time and energy into dollar forex (though the currency itself remains a little overpriced!).
I believe that as the Federal Reserve and European Central Bank approach the normalization of short term interest rates, and as bond yields approach zero, the euro will take a serious hit and this will accelerate the euro weakness in the currency markets. The dollar is also cheap at the moment on a global basis and so there has been a surge of investors buying dollar assets such as ETFs and Treasuries. One of the most popular dollar pairs at the moment is the Yen/U.S. dollar. It may be an interesting area for a future analysis when interest rates come down! I am in the market for more dollar assets and am looking for dollar stocks.
Can you buy dollar forex?
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