ForexYard Helps Explain Why the U.S. Dollar is so Strong

November 18th, 2008 Posted in Currencies, Market Analysis

Name: Yan Petters

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It has been about 4 months since the USD began appreciating with no apparent stops, and several of our traders are finding themselves a bit confused in light of these radical changes.

Let’s try to understand what the main reasons are for this turn of events, and also a special bonus – how you can predict sharp reversals using technical measurements.

Well first, let us understand something. When you hear on the news that the Dollar is gaining strength, it usually mean that the EUR/USD pair is sliding, as this pair is the main gauge for the two leading currencies. Many of the other pairs are acting in accordance simply because the EUR/USD has a heavy impact on the other currencies. However, the USD/JPY cross is a great example that the USD is not appreciating at all fronts and that its strength is still limited.

There are two main factors that are raising the USD so extensively against the EUR. First of all is the basic assumption that most investors are sharing. Their assumption is that every unfortunate data or announcement that comes from the U.S. is affecting predominantly the emerging economies around the globe, especially the leading European nations. This assumption is based on the fact that the U.S. is considered to be the leading force that turns the wheels of global industries. For this reason, the U.S. economy is taken to be one that has better chances to sustain the upcoming turmoil. Furthermore, it is viewed as one which entrepreneurs might continue investing in throughout these difficult times.

Investors around the world are currently seeking to only hold on to their capital, and the U.S is considered to be the relatively safest economy. They are assuming that any mishap that might happened to the U.S. will probably be similarly seen in the Euro-Zone, and therefore even when the U.S. is publishing troublesome data, they are still more concerned with its effects on the rest of the world, and not particularly on the U.S.

The second factor is the ongoing drop in demand for commodities, especially Oil. As we all know the price for a barrel of Crude Oil has recently dropped beneath $55. This has an immense impact on the Dollar, as Crude Oil is traded in U.S. Dollars. As long as Crude Oil demand continues to slide, the USD is expected to continue its bullish trend against the major currencies.

Now, as promised, the special bonus. Most of you are probably familiar with the “W, M” structures on the charts, which are considered to be the most accurate technical tool in the attempt to predict that a reversal is forthcoming. Well, if you’ll open the weekly EUR/USD chart on the ForexYard platform and will zoom out as much as possible, a beautiful view will appear before your eyes. Starting on February 10th an “M” structure began forming on the chart, and was validated on August 24th, as the “M” structure was completed. At this point the EUR/USD was traded at the 1.4700 level, 2200 points above its current rate. Now here’s a thought, if you would have predicted this formation and opened a small position worth only $50,000, right now your profit would have been around $11,000! Sometimes dreams can come true, but without the right tools, you will miss these great opportunities.