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An Introduction to USD-the Major Currency in the Forex Market

May 18th, 2012 | by | forex trading

May
18

Forex market provides traders the potential of making good money, at the same time, risks are also inevitable. Traders who are interested in forex trading should do their homework well beforehand in order to make good money. One of the things that they need to know is the major currencies in forex trading and the factors that may influence their value. Today, I am going to introduce USD-one of the major currencies in the forex market.

Why traders need to know USD in forex trading?

Novice traders who want to try hand in forex trading should first know USD. After we see the major currency pairs in forex trading, we will know why USD is so important in forex trading. Here are the majors: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD. From the majors, we know that USD appears in every major currency pair. The U.S. dollar is the currency most used in international transactions and is one of the world’s dominant reserve currencies. It represents nearly half of the trading volume of the major currencies, and it is the default currency for most transactions. Several countries use it as their official currency. From the above, it is not difficult for traders to understand that USD holds such an important position in the forex market at present. Thus, it is necessary for traders to understand USD before trading.

What influence the value of USD?

A lot of forex traders try to predict the USD value in order to make right decisions. There are a great number of factors that can be used in order to predict forex rates such as interest rates, price levels and so on. These factors can predict forex rates, but sometimes they do not work especially well in practice because traders consider numerous other factors in their buy/sell decisions and the momentum of speculation itself can influence exchange rates. But USD can be influenced by some major factors as follows. Generally, USD value is basically determined by the basic theory-supply and demand. When the demand for USD increases, the value of USD will go up accordingly. On the contrary, when the demand for USD decreases, the value of USD will go down accordingly. The value of the dollar is also heavily influenced by economic data. Data that makes the U.S. economy look stronger can be positive for the dollar and vice versa. Accordingly, traders need to pay careful attention to the scheduled releases of economic data like GDP, trade balances, interest rate and inflation etc. These data comes out at regular intervals. Traders are accessible to these numbers freely on the internet; they can also get the consensus expectations for these numbers, which can be used as reference when making trading decisions. Furthermore, the USD can also be driven by global condition. According to history, USD is prone to gain strength when the world is in chaos, at war, economic and political instability; on the contrary, when the global condition is more peaceful and stable, traders tend to diversify away from the USD.

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What Forex Beginners should Know about Forex Market

March 12th, 2012 | by | forex for beginners

Mar
12

What is forex market?

Forex market is an intangible market in which forex traders are able to buy, sell, exchange and speculate currencies. Forex market is made up of banks, commercial companies, forex brokers, hedge funds and investors. Forex market is considered to be the largest financial market in the world with trillions of dollars’ turnover each day.

The function of forex market

Forex market allows forex exchange, for example, forex traders can exchange USD for EUR in forex market according to the exchange rate. An import company may need to trade forex in order to pay for services or goods from other countries and an export company may need to exchange forex for their native currency. However, 5% of forex trading volume is from international trade and 95% is from forex speculation. Thus, forex speculation accouts for a much larger part in forex market. In total, forex market is a transparent and fair market where forex traders are able to trade forex of different countries.

What are traded in forex market?

Forex trading is always done in pairs – Currency Pairs, one currency is bought and the other is simultaneously sold in forex market; for example, forex traders can exchange Euros for US dollars. If the Euro really rises in value, they can sell the position and get profits from forex market. So currency pairs are traded in forex market. There are three types of currency pairs: majors, crosses and exotics. “The Majors” include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar, which are the most liquid currency and more than 85% of forex trading is traded with major currency pairs.

What are the most attractive advantages of forex market?

  1. Forex market opens for 24 hours worldwide.
  2. Forex market is a highly liquid market; the trading volume is 4 trillion dollars on a daily basis.
  3. High leverage allowed in forex market makes it possible for forex traders to get huge profit.
  4. Ability to get profit from a bull’s or a bear’s market.
  5. Forex market is a huge and global market, making manipulation impossible.

 


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Fundamental Forex Analysis -The Factors Affecting the USD

March 9th, 2012 | by | learn forex

Mar
09

For fundamental forex analysis, forex traders need to understand some basic relevant knowledge. And knowing the influence factors on the currencies you are trading is the first step to start the fundamental forex analysis.

Among the forex currencies, USD, the most widely traded currency, is normally considered the ‘base’ currency for quotes. And in this article we will start the fundamental forex analysis by introducing the influence factors on USD.

Policies of Federal Reserve Bank, Fed

Fed is the central bank of US, independently in charge of the monetary policy. The main responsibility of Fed is to control inflation and promote the economic development by open market operations, discount rate, and federal funds rate. Therefore, in fundamental forex analysis traders should take these policy indicators into consideration. Among them, Fed funds rate, the lending rate between banks when borrowing from each other, is the most important interest rate indicator. If the Fed plans show a clear monetary policy signal of the market, it announces a new Fed funds rate, which may cause a fluctuation in the forex market. Discount rate is generally lower than the Fed funds rate. It is a loan rate for commercial banks when borrowing from Fed, as well as a strong policy signal.

3-month Eurodollar Deposits

Eurodollars are time deposits denominated in U.S. dollars at banks outside the United States, and thus they are not under the jurisdiction of the Federal Reserve. The difference in the deposit rates is a valuable reference to assess forex rates. Take USD/JPY as an example; if the deposit rate of Eurodollar is much larger than Euro yen’s (the time deposits denominated in Japan Yen at banks outside Japan), the exchange rate of USD/JPY will be more optimistic.

Measures of Treasury Department

If the price of USD is too high or too low, Treasury Department can order Fed to intervene the Forex market. And selling/buying USD will be Fed’s strategy. Therefore the Treasury’s comments on the USD are also important indicators in the fundamental forex analysis.

Economic Data

The important economic data in US includes labor reports, CPI, PPI, GDP, consumer confidence and so on.

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