How to Make Money on the Dollar with Slow and Steady Interest Rate Increases

The US dollar rose in Forex markets after the FOMC implied that there will be a June rate hike. Reuters reports on the meeting and its Forex aftermath.

The U.S. dollar rallied broadly on Wednesday and hit more than six-week highs against the yen after the Federal Reserve signalled it was still on track for two more interest rate hikes this year.

The Fed kept interest rates unchanged, downplayed weak first-quarter economic growth and emphasized the strength of the labour market in its statement following the end of a two-day policy meeting.

The central bank also said consumer spending continued to be solid, business investment had firmed and inflation has been “running close” to its target.

The dollar rose by as much as 0.7 percent against the yen, and hit 112.69 yen, the highest level since March 21, as the Fed statement solidified expectations for a rate hike in June and another in the second half of the year.

Barring any unforeseen circumstances rates and the dollar will go up a little this year. But for the Forex trader the issue is how to make money on a dollar with slow and steady interest rate increases.

Seeking a Volatile Currency

The dollar will be stable with a slight increase this year against other major currencies. But for better Forex profits a trader needs a volatile currency. Two specifically come to mind. They are the South African Rand and the Icelandic Krona.

Iceland: Fish, Aluminum and Tourism

The Icelandic Krona has been doing well over the last two years, climbing from 140 to a US dollar to 105. The problem for Iceland is that it is a small country of 330,000 people and small changes in its three sources of revenue can cause big changes in the value of its currency. If you follow the prices of aluminum which Iceland processes because of its vast reserves of geothermal derived electricity, tourism and fish you might be able to trade the Krona against the more stable USD for a profit. Read the Deutsche Welle article about Iceland’s volatile krona.

What happens when a small country with its own currency has to navigate economically in a world dominated by huge countries with enormous banking systems and deep-pocketed financial speculators?

If you follow the prices of aluminum which Iceland processes because of its vast reserves of geothermal derived electricity, tourism and fish you might be able to trade the Krona against the more stable USD for a profit.

South Africa and Junk Bonds

South Africa was one of the BRICS countries that were set to enter the first rank of nations until the commodity bubble burst. Now the country’s currency is weakened and its government bonds are junk status. The South African discusses the roller coaster ride of the Rand.

Last Wednesday, the Rand lost almost 2% against the US dollar after rumours began to circulate that South Africa will be leaving the JP Morgan Bond Index. This has been largely expected after the country was downgraded to junk status by two major Ratings agencies last month.

South Africa’s economy is still heavily dependent on commodity exports and whenever there is talk of war or political upheaval the rand suffers. When stability returns the rand prospers. Watching the Rand and trading its rise and fall against the USD cold be profitable.