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What does this mean for currency traders?

So, if the global economy ceases demand for U.S. dollars, what will happen and what does this mean for currency traders? For starters, U.S. bond prices could fall which could trigger U.S. interest rates to rise. The dreaded 10-year treasury note interest rate rising above 3 percent is a prophetic level which is speculated to spark frantic risk aversion among traders. Due to this, the USD may cease to be the safe-haven currency as it has been in the past, but rather the Japanese yen or Swiss franc might become the new risk-off result. Mortgage rates and credit card rates could increase dramatically and the U.S. may again look to monetary stimulus or money printing to curtail the chaos. According to Forex historical data, the significant increase in the supply of U.S. dollars has been known to weaken the currency in the markets (see figure two).

FOREX MARKET The Forex Facts Behind the FATCA Bill

The USD’s purchasing power could then suffer further and cash savings and bonds will be obliterated. The result of this USD weakening could be companies struggling to survive causing life in the U.S. dollar world to change drastically. The scary reality is that all of this could happen overnight. It certainly doesn’t help that the equities markets are grinding to new highs as we speak on razor-thin volumes and the looming July 1 deadline is a fitting situation for the fiat currency’s demise. The domino effect of this occurs when the U.S. dollar declines, European and Japanese counterparts would likely join in for a massive devaluation to aid U.S. consumption, thus damaging the entire paper currency system.

As a U.S. citizen, do I want to see the U.S. dollar’s purchasing power reduced to nothing? Of course not. On the other hand, as an investor and trader, I am watching the USDX and U.S. 10-year Treasury Notes very closely for signs of major devaluation because of the profit potential this could create, even at the expense of the U.S. dollar. 

What will this look like on a chart and how can Forex traders position themselves to be profitable in a sour situation for the USD? Look no further than the USDX (provided by most major brokers and platforms). Thoroughly analyzing this index, one will discover that it virtually controls other major crosses, notably the EURUSD, GBPUSD, AUDUSD, NZDUSD, USDCAD, USDCHF, and USDJPY. In its simplest form, if the USDX is bearish, the cross pair will increase in value (e.g. the EURUSD and GBPUSD could gain in value and trend upward). If the USDX proves bullish, cross pairs should logically decrease in value (e.g. EURUSD and GBPUSD lose value and trend downward).

FOREX MARKET The Forex Facts Behind the FATCA Bill

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