When it comes the moment to decide whether to buy or sell dollars, all depends on the economy, claims Investopedia.com. Strong U.S. economy will attract investments from all the world, because of its safety and ability to achieve an acceptable return on investment. Investors are always looking for the highest level of profit that can be predicted or certain. Foreign investments create stable capital account, which leads to a strong demand for dollars.
On the other hand, the American consumption that require imports of goods and services from other countries, leads to the fact that dollars come out of the country. If the import is bigger than the export, then it comes the so-called current account deficit. A country with strong economy could attract foreign capital to compensate the trade deficit.
Factors, which have inffluence over the value of the dollar:
When the currency trader should take a stand against the dollar, he needs to assess the various factors that affect its value, in order to try to determine direction or trend.
The methodology could be divided into three groups -> factors related to supply and demand, sentiment and market psychology, technical factors.
Supply and demand for dollars:
When the U.S. export products or services, they create demand for dollars, because customers have to pay for these goods and services with dollars and therefore they would need to convert their local currency into shatska. So they sell their currency to buy dollars, with which to make payment.
In addition, when the U.S. government or large companies issue bonds to gain capital, and if these bonds are bought by foreigners, again they must be paid in dollars and clients need to sell their local currency to buy dollars and make the payment. Also, if the U.S. economy grows steadily and the companies increase their profits, then the willingness of foreign investors to hold shares of U.S. companies also requires them to sell their currency, in order to buy dollars for taking their shares.
Sentiment and market psychology:
However, what happens if the U.S. economy weakens and consumption decrease due to rising unemployment? Foreigners are likely to sell bonds or shares and return the funds to their homeland, where they can exchange them for local currency. Therefore, they sell dollars and buy back their currency.
As traders we should consider whether the supply of dollars would be greater or less than the demand. To see this, we need to follow different news, events and statistics, such as government data on U.S. employment, GDP data and other information about the market and the economy, which can help us to determine what happens with the economy and to assess whether it is stabilizing or weakening. In addition, we need to determine the overall sentiment in terms of what do the market players think. Oftentimes, the sentiment drives the market rather than fundamentals of supply and demand. As trading depends on the ability of investors to take risks and to manage them, they usually utilize a combination of the three methods above, to make their decisions whether to buy or sell.
The economic conditions during the recession that began in 2007, forced the U.S. government to intervene in an unprecedented way in the economy. As the economic growth declined as a result of the process of deleveraging, the U.S. government had to intervene by increasing government spending, in order to support the economy. The aim of these expenditures is to create new working places, so that users can make money and increase the consumption. The U.S. government took this position at the expense of increasing deficits and debt levels. The government financed the growth with printing new money and the sale of government securities of foreign governments and investors, which led to an increase of the dollar demand. As a result, the dollar has been depreciated. Another concern for the countries that issue debt at a rapid pace, is that the interest burden will increase and more dollars will be allocated only to cover the interest rates.
It could be useful for the trader to follow the dollar index chart to observe the movement of the dollar towards the other currencies in the index. Following the graphics models and the market sentiment, as well as the basic fundamental factors that have influence over supply and demand, a particular trader could get a general idea of the flow of dollars and thus to develop the ability to choose profitable positions in future transactions.