When considering global financial markets and currencies, the US dollar is certainly a major contender for the top spot when selecting the right currency pairs for Forex trading.
As one of the world’s largest economies, watching how it performs and keeping up to date with the latest news can also give worthwhile insights into the way markets are likely to move and overall financial sentiment, but what is the US dollar’s overall impact on Forex trading?
The US Dollar's Relationship With Forex
Internationally, the USD is extremely strong and acts as a key indicator for investment and trading vehicles of all types. It is often seen dominating a host of markets and leading the way for global financial speculation, but it also plays a vital role on the foreign exchange.
When considering the fact that the US dollar was one half of around 90% of all currency pairings for global transactions - and therefore being the most traded currency on the Forex market in December 2022 - it is clear to see that it will take a lot for other currencies to even rival its impact on the niche as a whole.
Just two months before this figure was released, global currency trading saw an unprecedented surge, causing market value to reach an astounding 7.5 trillion a day.
One of the main considerations for its role is that it is not only widely traded and used for financial gain in terms of global economical factors, but it’s also used as the vehicle currency for non-US tender that can’t typically be traded directly. This increases the number of dollars involved in transactions and ensures that financial markets are consistently facilitating trades.
The USD's Role In The Wider Global Economy
The dollar has been the top global reserve currency since World War II and this lends to its continued strength even in the face of economic uncertainty. It has the unique ability to act as a financial refuge when markets see a drop, often gaining in strength when other currencies begin to flail.
As countries experience changes both internally and externally, this often leads to their currency value fluctuating. This is what Forex traders look for, as shifts in their economy can result in currencies quickly becoming cheaper, or more expensive. As the market returns to normal, a temporarily high-yield currency can then be traded off to make a profit.
Consider the Kuwaiti Dinar - the world's most valuable currency. If an economic crash ever took place in Kuwait, the currency's value would decrease before an inevitable increase, making this transition period ideal for traders to cash in with a purchase, followed by a sale.
The US dollar is one of the only currencies to be supported by a large, consistently strong economy that has diverse global trade capabilities, well-appointed laws and major capital flows. As a result, it has one of the most impactful influences on international shares of global gross domestic product (GDP).
It is also the prevalent currency for international banking protocols, with around 60% of all international and foreign currency liabilities and claims undertaken using the USD. The good news is that the US implements a host of crisis containment efforts to reinforce the overall impact and security of the dollar and this lends to wider market stabilisation.
USD Strength Forecasts For 2023
The strength of the dollar is measured by the U.S. dollar index (USDX) and this will collate financial data from other currencies to determine its overall value at any given time. The dollar index will use information taken from the British pound, Euro, Japanese yen, Swiss franc, Canadian dollar and Swedish krona to define the USD valuation.
The U.S. dollar strengthened far beyond expectation against the majority of the leading global currencies in 2022 and this was largely due to the hiked interest rates of the Federal Reserve. There does seem to have been a drop in sentiment since however, with a significant percentage drop in the nominal broad dollar index between the closing months of 2022 and January 2023.
There is still hope for a strong performance for the rest of the year however, with high volatility in exchange rates expected to stay elevated due to US inflation, global recession risks and high macroeconomic uncertainty. These events have a history of increasing investor demand and boosting currency strength.
Forex Trading In 2023
The Forex market is extremely popular due to its volatility. Major currency pairs will vary between 50-100 pips almost daily, meaning the opportunities to trade for profit are both vast and varied. It is also one of the most accessible trading/investment environments for both beginners and industry experts.
Those making the most of Forex trading get to enjoy low trading capital, the potential to partner with a brokerage and the ability to use leveraged financial products to enhance their efforts, not to mention some of the most well-appointed, innovative technologies in the wider financial sector.
As the US dollar saw some worthwhile growth throughout 2022, even going as far as negatively impacting the value of other currency pairs such as the EUR/USD, GBP/USD and AUD/USD and elevating value to new heights as the dominant currency, there is still strong potential despite some industry insiders predicting a slow year ahead.
Many fear that advancements in tech, geopolitics and economics will cause a depreciation in the value of the USD and its wider impact on Forex trading and more.
It will be worthwhile to take a more subtle approach to trading on the Forex markets as a result - and keeping on top of economic news, up-to-date analytics and more will help traders to maximise potential and minimise overall losses.
There are no guarantees when investing in financial markets and Forex is no different, so practicing risk management is always advisable no matter how strong the USD is, or how well it performs over the coming months.