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Factors That Influence the Strength of the U.S. Dollar

[fa icon="calendar"] Jul 22, 2019 6:05:00 AM / by Lukas MacMacKen

When it comes to trading FOREX, one of the most important things to know is what causes a currency to rise or fall. Knowing this, along with having a rough idea of what a news announcement will say is one of the best ways to make profits. This is one of Shawn Lucas’ favorite ways to trade: scalp the news and catch the movements early on. So, what all in all constitutes some of the biggest strengthening, or weakening, movements in the U.S. Dollar, along with other world currencies.

One of the biggest movers in the FOREX market is interest rates. The interest rates are set to stimulate the economy and move the market. In the U.S., we rely on the FOMC, currently headed by Chairman Jerome Powell. Typically, a rise in interest rates will constitute a positive move in the strength of the currency. The interest rates are the countries overall way of controlling what is done with money, for the most part. This is one of the reasons it’s the biggest influence and Shawn Lucas’ favorite announcement to trade. Japan for example, has a negative interest rate. This negative interest rate is Japan’s way of influencing spending in the economy. The more money that is spent in an economy, the more it has the ability to grow economically and strengthen the economy.

The increase in strength and the spending in the economy also can strengthen the dollar. One of the basic Macroeconomic equations is C+I+G=Y. This equation states that c (consumer spending) + I (Investments) + G (government Spending) all equals the Y (GDP) of the country. While this equation does not touch on certain other aspects of GDP, the idea stands. With countries like Japan who have negative interest rates, the hope is that instead of sitting in the bank where you will lose money, you will spend it instead and and thus increase the economy and strengthen the dollar. This equation can also be looked at as how the U.S. escaped the Great Depression. With the start of World War 2, the U.S. government had to suddenly increase spending on military efforts increasing the “G” and getting the U.S. out of the recession.

Employment rates also have a huge impact on the strength of a pair. Non-Farm Payroll, for example, which the Bureau of Labor Statistics releases the first Friday of the month, is a huge event for the USD. Looking at how many people have been hired on in the past month, along with statistics detailing how many people are looking for jobs or leaving their jobs has a huge impact on the economy. A lot of this can relate back to consumer spending. People look for jobs to have money to spend. A more detailed picture of the Non-Farm and other unemployment effects on FOREX can be seen in Unemployment’s Effect on the FOREX Market."

Whether you are a huge proponent of trading the news like Shawn Lucas or tend to stay away from the announcements, they have a huge bearing on the markets. One announcement going the wrong way could shoot up the price or lower it. Scheduled news is just the first step, however. Any slew of things can change the rates from a tweet about a new tariff to a leak about a new deal. The real power in all of this lies in knowing approximately how much each of these will change the charts you see.

Topics: USD, World Economy, trading forex, shawn lucas

Lukas MacMacKen

Written by Lukas MacMacKen

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