The US dollar is on an upward march in Q3 of 2022. What does that mean for forex (FX) traders? More importantly, how can foreign exchange enthusiasts leverage the power of up-to-date information about vital subjects like interest rates, corporate activities, inflation, the US Federal Reserve Bank, and more? Fortunately, interested traders need not hold advanced degrees in economics or accounting to understand the effects of government action on the various markets. Virtually everything a developed nation’s legislative bodies do has at least a minor effect on FX markets and associated currency strengths.
What are the direct and indirect rising interest rates on traders, corporations, and other third parties? More importantly, how does inflation impact the various major and minor forex pairs and what are the upsides and downsides of a strong dollar? Those questions and many others weigh on the minds of anyone who has even a passing interest in FX. The following details can assist prospective and current trading enthusiasts in making sense of the latest round of financial news.
Rising Interest Rates
One of the most decisive actions a national government can take is to raise interest rates. Forex watchers who use top platforms like AvaTrade’s MetaTrader 4 can carefully track every slight change in the value between the US dollar (USD) and any other listed denomination. Why do higher interest rates matter? In nearly every kind of economic environment, when a government action impacts rates, it becomes more costly for consumers and banks to borrow dollars.
There are several other factors involved, but when institutions and non-US investors have to pay more to borrow USDs, the currency rises in value, mainly due to high demand. Lenders want to acquire the US-based fiat money because they can earn higher profits by lending it out. In all, when the Fed institutes a rate hike, it sets off a kind of chain reaction that eventually strengthens the dollar. The same process takes place in other nations when their own national banks act to increase demand for the domestic currency, whatever it is.
Why FX Traders Care About Inflation
In many ways, inflation acts as a kind of financial cancer on economies. Uncontrollable rising prices are in no one’s best interest. But, if you’re buying and selling currency pairs, it’s advantageous to know where the inflation rate stands and where it’s headed. If country A’s rate is 8% and appears to be moving upward, that could be a strong sign that A’s fiat currency will become weaker in relation to other nations that are not experiencing a rising level of domestic prices.
USD and Forex
One thing FX practitioners prefer to follow is the strength of the USD. Interpreting charts can be a tricky business, but more data is always better than less. In the third quarter of 2022, the USD is showing signs of resilience, despite many financial and economic problems. Can the dollar maintain its upward trajectory through next year, or even for a few more months? The main takeaway for FX followers is that the US currency often serves as a safe haven investment for non-US nations, institutions, and individuals. The upshot is that strength attracts investors, increases demand, and can lead to higher values. Eventually, the rise runs out of steam. The fourth quarter of the year could be the time that the upward move exhausts itself and the world’s leading fiat currency sinks back to former levels.
How Forex Traders Benefit from Rising and Falling USD
The primary fact about FX trading is that the people who take part in it are not long-term investors for the most part. Most who purchase and sell currency pairs are short-term or swing-period speculators who have no vested interest in whether the US dollar is in good or poor health. When it comes to FX, people want to know which direction the USD is likely to go, up or down. People follow financial news for a wide variety of reasons. FX adherents usually do so to glean clues about the near-term health of one or more fiat currencies.
When the USD shows strength as a result of Fed action to raise interest rates, that can serve as a signal for traders to acquire dollars and sell other currencies within a pair. The entire process for traders is a game of balancing multiple factors against one another. Seldom does a single governmental action have an immediate or direct effect on markets. But because the US government controls the world’s leading form of fiat money, it has a unique power to impact daily values of various forex pairs.