The US dollar (USD) is usually a key part of a forex trader’s portfolio. It’s one of the major fiat currencies in the market and is known as the base currency of the world. If you choose to trade a major forex pair including the dollar, then you may conduct fundamental and technical analysis of the two currencies, to assess the entire market and evaluate how the dollar is moving in relation to the other currency. This will also involve close monitoring of the factors that can affect the value of the dollar, such as the strength of the economy, international relationships for trade and geopolitical events.
According to online trading platform Skilling, forex trading is:
“…one of the most popular financial markets. One reason is that, in particular, the major currency pairs are traded in extremely high volumes giving the market high liquidity.”
But alongside its high liquidity, comes volatility and risk. Plus, over the past few years, the US and the world have been dealing and recovering from the unprecedented coronavirus (COVID -19) pandemic.
If you’re looking to open a position on the forex market, then it’s vital to understand the factors that can cause the rise or fall of the US dollar.
The price of oil
One of the important relationships to consider when forex trading, is between the US dollar and oil. Their values are intrinsically linked, as the rise or decline of one can cause the movement of the other. This is mainly due to the fact that the benchmark prices of oil are valued in dollars. Furthermore, the US is one of the major producers of crude oil, West Texas Intermediate (WTI). This is the second-most-traded oil benchmark and is traded on the New York Mercantile Exchange.
It can be deduced that the growth of oil production in the US has contributed to the strength of the nation’s economy. In turn, this affects the value of the US dollar. The energy industry is also a considerable contributor to the US gross domestic product (GDP) — the standard measure of the market value, created through the production of goods, and services in a country during a certain period.
Understandably, the US government plays an important part in the movement of the US dollar. This is particularly effective in the period of an election and the resulting inauguration of a new president.
As prospective candidates begin their campaigns, the forex market can witness a time of uncertainty and volatility, which can be reflected in the value of the dollar. This has been felt more so in recent times, as the US transitioned from Donald Trump’s presidency to that of the 46th president, Joe Biden.
During 2020, America experienced some poignant events in history. Firstly, the Democratic party won across both the Congress and Senate — which at the time, gave the impression that new political policies would be passed more easily. The world also witnessed Capitol Hill and the White House being stormed by protestors, and Trump being impeached for the second time.
These events were highly disruptive, which had a significant effect on the market sentiment and trading campaigns about the US dollar, at the time. The currency then saw a slight upward trajectory after the Democratic win, as this reinforced some certainty for the US, and as result, the forex market.
Biden’s victory was also an important factor to consider as a forex trader, as the plans he set out (and followed through on) involved an increase of fiscal spending. Arguably, the resulting rise in inflation has become a continual problem for the president. There have been increasing prices of petrol, used cars, beef, eggs, electricity, and rent over the past year.
As always, the inflation and interest rates of a nation are closely analysed by forex traders, as this can influence the strength of the US economy and the US dollar.