Here’s a forex market movement for our times:-

Despite forecasts for a depreciation of the Dollar, many economists are now saying that the negative housing data released from the United States yesterday may actually bolster the USD.

Let’s state the effect in the simplest possible terms.

Bad news for the US economy, lower jobs, lower GDP, leads to lack of confidence
Which leads to a rush towards safe haven currencies…
Which leads to buying USD – because USD is in itself, considered a safe-haven currency…
So bad US news leads to USD going up.

This rush to a safe haven, any safe haven, after every news announcement is creating some weird effects. It flies in the face of logic, well, simple logic anyway – and is a sign of the present dominance of USD

No, I don’t know of any name for this upsidedown, wrong-way-round, echo, reverb effect – but it certainly ought to have a name…

It’s all about safe havens

The USD appears to be the safest investment, as traders are moving en masse to buy into the greenback.

Some people reckon that (if the entry point is right) currencies such as AUD or NZD might turn out to be the better safe havens during the present financial crisis – maybe… CHF has always had a lot to recommend it. And the irony is that while it certainly isn’t borne out with pair prices at their present levels, as a long-term safe haven, the US dollar might not turn out to be that safe a haven after all…

US Dollar dominance
This effect, whatever it’s called, is certainly a sign of the overwhelming domination of the forex trade by the US dollar. From memory, about 85% of the traded volume in the whole forex market, involves the dollar. Structurally, this is always going to bring problems in practice. Excessive dominance? Not for us to say – the situation is as it is, for as long as it stays that way…

If we were serious economists, interested in fundamental analysis for its own sake, the theory of market movements, etc. we probably ought to be worried – but we’re just common, vulgar forex traders, all we do is operate the system for what it is…

But what to call the actual effect? Any ideas?

Please note – I’ve said USD throughout this – not USA, necessarily…

One Response to “We Need a Word for this Ridiculous New Effect in the Forex Market – Any ideas?”

1. Costas says:

   February 27, 2009 at 4:38 pm

   Bad echo effect…!

   Reply