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And below, read on for an essay by Imre Gams on how the Fed’s policies affect the U.S. dollar and the global economy…
The dollar is the most fascinating currency in existence today…
So today, we’ll be taking a deep dive into it as the first of eight forex “majors.”
Its status as the world’s reserve currency means every central bank in the world maintains a large amount of dollars on hand.
And these reserve dollars have many uses… from paying down debts, making investments in the U.S., and paying for commodities like oil and gold.
It’s very helpful to the global economy to have one singular reserve currency…
A reserve currency makes transactions between countries and corporations easier to facilitate, and it helps stabilize exchange rates for currencies around the world.
Much like how English is the international language of business, the dollar is the international currency of business.
As you can imagine, if the Fed makes any big changes to its policies regarding the dollar, then it’s going to send shockwaves through the global economy.
The Fed has two main tools it can use to influence the dollar’s strength or weakness.
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The Fed can adjust interest rates higher or lower. Raising rates will typically strengthen the dollar. Lowering rates will weaken it.
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The Fed and the government can decide to simply create more dollars. The mainstream media refers to this as “printing money.”
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But the truth is, most of these new dollars aren’t $100 bills fresh off a printing press. They’re mostly just digital ones and zeroes.
The process of “printing money” involves monetizing the country’s debt where the federal government (specifically the U.S. Treasury) sells bonds on the open market.
First, the nation’s largest banks and financial institutions (FI) snatch up these bonds.
Then, the Fed buys the bonds from these other entities, putting the bonds on the Fed’s own balance sheet.
The banks and FIs are just the middlemen. The U.S. Treasury ends up with new money from the proceeds of the sales of these bonds, while the Fed ends up with the bonds on its balance sheet.
This entire process is known as Quantitative Easing (QE).
Together, these tools at the Fed’s disposal are incredibly powerful.
At any given moment, the Fed is usually on one of two possible policy paths.
The first possible path is known as a tightening cycle. The Fed will stop QE and raise interest rates during such a cycle.
This path is intended to cool down an “overheated economy” and tends to coincide with a stronger dollar.
The other path is an accommodative one, where the Fed is actively employing QE while lowering rates.
Think of the 2008 Financial Crisis or the COVID-19 pandemic. This kind of policy tends to weaken the dollar, at least at first. This path is meant to stimulate a weaker economy.
Right now, the Fed’s current policy is to try and cool down the economy to bring inflation back down to its target range of 2%.
That means raising interest rates and reducing the Fed’s balance sheet.
The market has responded to the Fed’s pivot in policy by buying the dollar, which has seen it soar in value relative to all the other majors.
In fact, the British pound has just recently fallen to a new all-time low against the dollar.
Meaning for forex traders, the market right now is as good as it’s ever been. There are many profitable trading opportunities every month.
Next week I’ll walk you through a recent trade I made involving the dollar. It’s one of the beta trades I’ve taken while testing out my new forex trading strategy.
The results so far have been positive – a perfect track record of 12 winners out of 12 trades. So don’t miss out on next week’s issue.
Happy trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
In today’s reader mailbag, Jeff Clark Alliance member David shares his thoughts on the markets…
Thanks for all your insights and help… I’m not getting rich from this yet, but at least I’m seeing green on my account instead of red!
I believe in the BPGDM. Not blind faith, but historical data kind of faith. We’re just going through a really weird time in the market and the world… The VIX signals have me kind of worried, but from my personal research, I don’t think it’s more than a temporary glitch. Like you have said… it’s just a time to hunker down and keep looking forward.
I’ve only been in the options market for about two years, but with your help, I’ve learned so much. Thank you for that, and keep the faith! No, I’m not religious, but faith keeps us thinking positively!
– David B.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.