Forex Investment and Currency Trading

The broad rebound in the USD that got underway late last year has extended further over the course of the past few weeks. The USD reached its highest level in just under three years against a basket of its major currency peers at start of March. USD strength has coincided with a sharp slide in equities and renewed concerns about the health of the global economy, suggesting that the USD has found strong support from “safe haven” demand and the “liquidity premium” that investors still associate with US financial markets.

The current tide of USD buying is perhaps very close to a medium term “high water” mark. The US economy continues to struggle amid rising unemployment, falling consumer demand and a housing sector that has yet to find a bottom. Even formerly positive aspects of the economy are struggling; while global demand has clearly retreated, the strength in the USD is also weighing on the export sector and net exports were a significant drag on GDP growth at the end of last year.

The foreign exchange markets are still largely a parade of very poor and worse choices for investors though some remain of the opinion that the challenges facing the US economy – not the least of which is the massive budget deficit (the Obama administration tabled a budget proposal that implies shortfall of USD1.75tn for the current fiscal year, more than 12%/GDP) – represents a significant threat to the USD in the longer term.