Forex Trading

In Forex trading many expected the dollar to fall after Standard and Poor’s dropped the US debt rating from AAA to AA+. The stock markets of the world certainly took note with stocks falling everywhere. However, the threat of a worldwide double dip recession sent investors scurrying to safe havens and the US dollar still qualifies as one. US treasuries sold for a lower than expected interest rate at auction despite the cut in their alleged safety. It is useful in Forex trading to sort out important information from non important information. The US debt downgrade may just fall in the latter category. Standard and Poor’s underwent a lot of justified criticism for its debt ratings prior to the 2008 stock market collapse. Flimsy hedge funds rated AAA attracted investors who lost nearly everything when these houses of cards collapsed. Now the same folks whose debt rating abilities underwent such scrutiny are making sure that everyone knows that they “mean business” as they downgrade the debt of the world’s largest economy.

In Forex trading as in stock and commodities trading investors shed risky assets in times of trouble. It would appear that the general consensus is that US debt is a safe haven in times of trouble. Traders will have to watch the markets but at first blush the dollar is surviving the creditworthiness issue. While speculators expected a higher interest rate at auction the flight to the dollar in Forex trading resulted in lower priced treasuries. The 10 year note is near the lowest from late 2008, just over 2.3%. Experts are saying that the issue is security and not yields and the US dollar and US debt instruments are still seen as secure despite the actions of Standard and Poor’s.

The dollar outdistanced the Euro in Forex trading after the US debt downgrade. Apparently traders are more concerned with the multiple debt issues in Europe and with the ability and willingness of the USA to pay its debts. All that having been said those Forex trading the dollar will want to watch as the US Congress seeks to address the US budget and continually increasing debt. The flip side of this was highlighted when the acting chief of the International Monetary Fund cautioned that dropping spending in the US too rapidly could have ripple effects throughout the world a lead to an economic downturn and “double dip” recession. As this issue plays out those Forex trading the dollar may hedge their positions with options trading instead of directly buying and selling dollars. By using the options market traders can leverage their investment capital and at the same time reduce investment risk. Using options in Forex trading allows the trader to risk only the price of an options premium. However, he still gains the same value of a big move in the price of the dollar as if he had purchased or sold the greenback. This investment leverage coupled with risk reduction can be very attractive when Forex trading in risky markets.