Fundamental Analysis : The U.S Dollar

Fundamental Analysis : The U.S Dollar

The U.S Dollar is by far the most traded currency in the world. This is due to it being the World’s reserve currency and either the base or the quote in all of the major currency pairs. In other words if you’re trading forex, or alternatively taking out binary options on currency pairs, then USD will figure heavily throughout you trading day. In fact trading almost anything touches, however tangentially, upon the greenback. Oil is priced in USD, gold is inversely correlated with USD, some of the most important stocks and indices in the world are located in the United States. As such if you are new to binary trading (or any type of trading for that matter) the US dollar should be one of your first points of departure as far as your research is concerned.

A very useful tip that not many sites seem to share with their readers is the US Dollar Index. This is a well-kept secret that is out in the open for everyone to take advantage of. Instead of monitoring USD separately against all of the major currencies, the US Dollar Index can be used as a tool by traders wishing to determine the overall strength of the U.S dollar at any given time. The way it works is by awarding the US dollar a value according to its strength as compared to a basket of several other currencies. Though not providing an accurate trade-weighted reading it is nevertheless considered an important indicator and is well-worth adding to your armoury as a trader. It’s advisable to use the U.S Dollar Index as a way of confirming or refuting the trading signals that your other indicators are providing you with. Use the US Dollar Index as a checkbox when placing trades that involve the US dollar to ensure that as many indicators as possible are pointing you in the correct direction.

The most well-known relationship on the markets is the one that the US dollar has is with gold. The US dollar is inversely correlated with gold. This means that when gold rises USD drops, and vice versa. This historical relationship is not set in stone and can fall out of sync from time to time but it is generally true to say that a rise in one will mean a drop in the other. The reason for this relationship, and indeed occasionally for why it doesn’t hold up, is that both USD and gold are considered safe havens by investors. USD ‘s central position on the global currency markets means that when any sort of instability presents itself, investors flock to USD, which is universally recognised and accepted. In much the same way Gold is seen as a protection against financial instability, but it is also used as a hedge against inflation. So in times of crisis investors flock to this precious metal. The dynamics of each specific crisis will determine which of these two competing assets wins out and attracts people’s capital and when one wins, the other necessarily loses.

A useful currency pair to keep in mind when trading on this relationship between gold and USD is USD/CHF. Due to the Swiss franc being 25% backed by gold its currency is positively correlated with gold. USD/CHF then, is a perfect pair for traders wishing to capitalise on the relationship, especially binary traders who can profit on both upward and downward turns.

As mentioned in a previous post, it is important not to regard these relationships as linear, they are much more diffuse than this and the subtlety of being a trader is being able to apprehend how a complex interplay of relationships affects a given market. This is why no amount of research is ever quite enough, you can never know everything but you have to constantly be finding out more. The more you know the more connections you can draw and the more insightful your trades will become. This is why fundamental analysis is so important.