The import and export volume of the US also exceeds that of any other country. On a netted basis, the US is running a very large trade deficit of nearly $500bln. This is because the US is the largest trading partner for most countries, representing 20% of total world trade.

This large absolute number indicates that the USD is heavily reliant on capital flows and the dollar is very sensitive to changes in those flows. In fact, in order to prevent a further decline in the USD as a result of trade, the US would need to attract close to $1.9bn in capital inflows per day.

The US is primarily a service-oriented country with nearly 80% of their GDP coming from real estate, transportation, finance, healthcare, and business services. With the advent of new technology such as the internet, productivity in the US has consistently increased. This is particularly interesting in light of the US's recent economic downturn, because many economists argue that despite the current downturn, increased productivity indicates that we are in a "new economy." The importance of this comment is that if the US is indeed in a "new economy," previous reactions to recessionary conditions may not repeat themselves in this downturn.

• USD Characteristics
• Highly Liquid Currency
• Structural Trade Deficit
• Dependence on Capital Inflows
• Low Current Interest Rates Trading USD

The USD has extremely high trading volume, and against most other currencies it is the most liquid cross. The dollar has had low interest rates recently, and combined with the large US trade deficit, budget deficit, and the capital outflows from investments in the US, this has led to a significant push against the dollar. Many traders feel that these underlying fundamentals are now inherently part of the US dollar’s makeup rather than cyclical.

Economic Indicators for USD
Employment Data—Of great importance in USD economic data has been any number that relates to unemployment. Typically, non-farm payrolls are released on the first Friday of each month, along with the Unemployment Rate for the previous month. Every Thursday at 8:30 EST weekly Initial Jobless Claims are released as well, but the monthly releases carry more weight. Because many economists feel that the US is in a new economy where productivity gains will replace increases in the number of workers, jobs data is critical. On the first Friday of each month it is critical that traders are aware of these data releases when trading any USD pair.


International Trade and Portfolio Flows—It is a given in US economic data that the Trade Deficit will be large, but the inflow or outflow of investment (measured by portfolio flows) will change as returns on US investments change. Because the USD relies so heavily on inflows to make up for the trade deficit, the market is sensitive to changes in these portfolio flows.

GDP, ISM, Industrial Production, Retail Sales—These numbers are all straight-forward measurements of growth in the economy. Simply put, the higher the number, the faster the growth, so if any of these releases beats expectations the result can be positive for the dollar. GDP is a quarterly figure and carries more weight than any of the other figures, which are all released monthly and are only components of GDP.

US Equities Markets—The US has the most liquid equities markets in the world, and the S&P 500, NASDAQ, and Dow Jones Industrial are highly publicized measures of the strength of US equities. When equities are experiencing an extended bull market, the US dollar can trade in lock step with the S&P 500 as it strengthens or weakens during the course of a trading session.

US Treasuries—The US Government bonds market has only one serious competitor in the form of Germany’s Bund market. Comparative rates on the 10 Year Treasury vs. the 10 Year German Bund can give an indication of the strength of the US dollar vs. the Euro.

FOMC Meetings—The Federal Open Market Committee meets 8 times each year to determine the base interest rate for the US dollar. Rate hikes can sometimes weaken equities markets and lead to a sell off in Treasuries that leads to higher yields, but USD will normally strengthen on rate increases. The FOMC also releases a statement that predicts future rate decisions, and the market can often react to these statements as well.


Note:

Jimmy Young is a seasoned institutional forex trader having 20 years of experience with different banks. He headed up bank FX dealing rooms. He is FX profitability consultant to major European private bank. He manages funds and also trades personal money. Between 1981 and 2004 he was a foreign exchange trader at following banks: Societe Generale, Julius Baer, Fuji Bank, Indosuez, Erste, Hill Samuel, Manufactures  Hanover, Paribas, European American. www.EurUsdTrader.com