One of my strongest beliefs about the Forex market is that it is driven by the U.S. Dollar. This belief has helped me to trade profitably by avoiding chasing movements between more minor currencies. There are two facts behind my belief. Firstly, the U.S. Dollar accounts for approximately 80% of global Forex trade, i.e. about 80% of all trades involve the U.S. Dollar. Secondly, if we look at historical price movements since the turn of the century, it is obvious that the U.S. Dollar has trended more persistently and strongly than any other currency – trend traders in Forex have needed to focus on the greenback to turn a good profit.
The centrality of the U.S. Dollar to the Forex market is a topical subject, because right now we are in a good, active trader’s market, and it is all driven by the U.S. Dollar. The U.S. Dollar Index just hit a 3-year low last week, with the Euro and WTI Crude Oil also hitting 3-year high prices in U.S. Dollar terms. The weak Dollar also helps boost U.S. stocks – if you think about it, if stocks go up by less than the U.S. Dollar Index, then stocks are not really rising, they just appear to be rising because they are priced in U.S. Dollars. Here we have one of the key reasons why the Trump administration strongly desires a weak U.S. Dollar: so that they can point to a strongly rising U.S. stock market as evidence that their policies are working, and they are delivering an increase in wealth to the American people.
There is a lot of speculation as to why the U.S. Dollar is going down when fundamentals and tightening monetary policy would seem to support it, not to mention the attractiveness of the US stock market, which should attract foreign currency to flow into USD. It shows that fundamentals often count for little in the markets, although admittedly recent rate hikes have been expected and arguably “priced in” by markets already.
Some analysts see the weak USD due to the poor international image of the Trump administration. I disagree. I think one of the crucial drivers is that President Trump has always required a weak Dollar to achieve his goals, and I think this is what is really affecting the market’s sentiment on the greenback, knowing that the President will do everything he can to make the Dollar weaker. With strong market sentiment and technical against the U.S. Dollar, it is a good time to be short of this currency.