Dollar Heats Up Forex Market
Options News by BetterTrades
After several weeks of upbeat news, ranging from profitable forecasts emanating
out of winded banks to an uptick in durable goods orders, Monday's revelation
that major U.S. automakers were failing to meet expectations set by the
White House prompted a return to risk
adverse currencies like the yen and dollar.
On March 30, the yen climbed 1.8% to 127.72/euro from Friday's close at 130.04/euro.
The yen also rose 0.7% against the dollar to 97.17 from 97.86. Repatriation has
contributed to extending the yen's recent bullish trend despite difficulties
confronting the world's second largest economy.
The dollar index, measuring the greenback versus a weighted basket of six
significant currencies, climbed to 85.963 versus 85.138 at Friday's close. The
greenback has been finding support as it continues its furious run against the
euro - up about 6% from January through March, capping four consecutive
appreciating quarters.
This week's G20 meeting will likely serve to underscore more strength in the yen
and dollar as expectations for global stimulus initiatives called for by President
Obama could fall on deaf ears.
Commodities, usually trading in part in response to fluctuations in the dollar,
could serve to support the dollar as well going forward. Extended demand
destruction coupled with a technical break on crude's run towards $50/bbl signals
the larger inflation play is on hold, at least temporarily, until economic
activity picks up.
Continued demand for interest-bearing notes should also prop up the dollar. As
the U.S. expands its issuance of Treasury securities to finance the explosion in
fiscal spending, foreign investors purchasing Treasurys will support demand for
dollar-denominated notes.
If the dollar strength does indeed persist, now could be the time to wade into
options contracts on the greenback against the euro.
FOREX options trade similarly to traditional equity options in that they grant
buyers the right to purchase but not the obligation. Additionally, FOREX options
trade over-the-counter, are valued based on strike prices, and can be either
American or European-style contracts.
Learning how to interpret how currencies are reported is essential to learning how
to trade the FOREX market. Because a FOREX trade is in essence a long bet against
one currency and a short against another (known as a pair trade), quotes are
referenced using two currencies. Exchange rate changes are described in pips; a
pip represents the smallest price change that can occur for any exchange rate.
The dollar's story has certainly been a capricious one of late. From October of
2007 to the end of 2008, Fed Chairman Ben Bernanke moved to lower the fed-funds
rate from above 5% to a 0% target. Pricing in the Fed's dramatic expansionary
policy during this time, the dollar plunged to all-time lows against an array of
counterparts including the euro and pound.
When interest rates grounded out near 0%, some believed the Fed was out of bullets
and the dollar recouped a large chunk of the territory it had given up. Then, on
March 19th, the Fed put its quantitative easing pedal to the medal, announcing
$750 billion in planned MBS spending, along with $200 billion for agency debt and
$300 billion in long-term U.S. Treasurys. The dollar responded, turning lower of
its near-term highs.
Massive monetary expansion weakens dollar fundamentals, leading most to believe
the greenback will be facing an uphill battle as inflationary pressures heat back
up. Yet investors have been frantically searching for safe-haven vehicles while
uncertainty reigns supreme.
Risk aversion is making dollar options look mighty attractive. It's all about the
Benjamins.
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