The US dollar is getting stronger, and the news has attracted the attention of traders all over the globe, particularly those who operate in the forex markets. But the effect of the greenback's rise is even wider and more significant than that. For instance, when the US currency gains strength, China's yuan typically runs into hard times. In today's stressed economy, even a US trade ally like Japan has difficulty navigating an environment where the yen struggles to gain parity with other major currencies.
In Europe, the story is much the same, as the EU fights off a nasty bout of inflation and now has to deal with a declining euro. Anyone who trades forex on a full-time or part-time basis, as a newcomer or experienced practitioner, should regularly review major international events. What happens in one of the major economic engines of the world usually has a ripple effect. That's why one development with the USA's currency can have such a profound impact on all foreign exchange traders. Here are some of the most relevant news items related to the dollar's recent improvements.
China's Weakening Yuan
The communist government of mainland China enjoyed a consistently strong yuan, its national currency, for years until recently. Centrally planned economies tend to have difficulty sustaining their international fiscal health and China is no exception. There are dozens of reasons for the nation's slide into economic trouble, the leading one being widespread, harsh lockdowns in Shanghai and other large production centers. For the yuan, the bad news of a weakening exchange rate was like a perfect storm because it appeared as the US dollar began to get stronger.
Not only did the dollar move up while the yuan moved down, but the Chinese domestic economy is also beset with logistical problems, production drop-offs, and supply shortages in hundreds of consumer goods. What's the opportunity for currency traders? Individuals who take part in Forex trading with AvaTrade can view their news feed to stay abreast of developments in China. Keep an eye on the nation's continued troubles and wait to see if the yuan's fall becomes a long-term trend. In foreign exchange, currencies often develop long-range bouts of ill health, and the yuan could be on that road.
Trouble In Japan
Japan, once the shining star of the world economy, has fallen into a rut. That means the yen is not doing well, and the country, like China in many ways, is facing production, logistics, and other domestic economic challenges. The yield for Japanese debt issues is barely above zero percent, not an attractive rate for investors from any country. Since early March, the yen has steadily weakened against the dollar. After a short bout of recoil during which the Japanese currency strengthened against the USD in early May, the weakening continued. For forex enthusiasts, the thing to watch is whether the yen's weakness is just a short-term blip on the currency charts or a more endemic trend that will last for a full year or longer.
European Inflation Worsening
The EU is full of troublesome situations in 2022, so it's not surprising that the euro is taking a major hit against the dollar and several other currencies. Will the EU bankers raise interest rates in the hopes of reining in inflation and supporting the euro? Apparently not, at least if recent pronouncements carry any weight. It looks as though the European Central Bank (ECB) would rather endure a weak euro and higher prices in national EU economies than tighten its fiscal policies. FX followers should stay informed about all announcements coming out of the ECU's official website because the bank has a reputation for signaling its intentions for fiscal changes at least one month ahead of schedule.
Tips for Forex Traders
What can FX traders do to avoid making mistakes during a time of heightened volatility in global markets? First, avoiding emotion is always a wise practice, but when wars, inflation, and supply chain problems beset multiple nations at once, aim to stick to your rules for entering orders and exiting positions. Don't let short-term emotions based on a single news headline or gut feeling interfere with a well-crafted strategy.
Consider using proper risk management techniques that allow for careful placement of stops on both sides of orders. Don't rely on a stop to get you out of a position at an exact point. Further, experiment with using larger time frames to gain a bigger picture view of how the trends are forming. In many situations, one of the most effective ways of countering a volatile marketplace is to base decisions on week-long or month-long trends instead of short-term ones.