The USD still ranks among the major forces that drive financial markets all over the world. When the USD gains in value, it rarely affects currency pairs alone; it may have implications for commodities, stock market indices, capital movement, and risk appetite.
As a trader, knowledge about the cyclical nature of the USD’s strength may help discover trading opportunities in several CFD markets at once. JustMarkets, a multi-asset CFD trading platform, allows traders to have access to various instruments in one single trading System.
What drives dollar strength
For example, there are several factors that play a role in determining the value of the dollar.
First, the stance of the Federal Reserve plays an important role. An expectation of tighter US monetary policy and higher interest rates is likely to increase the demand for the US dollar.
Secondly, safe-haven flows of money play an important role. Investors tend to invest in dollars when there are high tensions in geopolitics or when risk appetite falls.
Thirdly, growth differentials matter. The perception of the US economy being healthier than that of other countries can lead to the expectation of a relatively more hawkish stance of the Fed against an easier stance of other central banks.
Why traders watch DXY
DXY is the name of the US Dollar Index. Even though this index is usually not used to generate any signals for trading directly, it may give some hints about how the USD behaves overall.
If the DXY is growing, then there is usually increased demand for the dollar. It can make pairs like EUR/USD and GBP/USD fall in value, USD/JPY rise, and have an impact on commodity markets. The decline of the index can potentially have the opposite effect. Impact on major currency pairs
The strength of the dollar impacts major FX pairs. The EUR/USD and GBP/USD tend to fall when there is an increase in the demand for the dollar. The USD/JPY can appreciate if the strength of the dollar is due to strong US yields; however, the flow into JPY due to safety concerns can make things more complicated.
Commodity-related currencies might also have a reaction. In the case of the dollar gaining strength due to risk-off conditions, commodity-related currencies could come under pressure.
Impact on commodities
The strong dollar can exert pressure on commodities, since most international commodities have been priced in US dollars. As the dollar appreciates, commodities could become relatively expensive for those who pay in foreign currencies.
Gold contracts tend to be particularly vulnerable to dollar strength and high interest rates. The appreciation of the dollar and interest rate hikes could affect the gold price, whereas the dollar depreciation could favor the precious metal.
CFD opportunities across markets
The dollar cycle can generate trades for CFDs in forex, commodities, indices, shares, and cryptocurrency marketplaces. Via the use of JustMarkets, traders can keep track and trade in the CFD markets from one single platform, thus comparing correlations and responding to changes. For instance, a stronger dollar and declining gold and indices can imply that there is a general risk-off scenario.
Turning USD movements into market insight
For traders, watching DXY and its market reactions may assist in finding other CFD trades. Sometimes, some of the important clues can be found when all three market groups tell the same story.
Risk warning: Trading CFDs involves a high level of risk and may not be suitable for all investors. CFDs are leveraged products and can result in rapid financial loss.
