Stock Market Investing and the USD

Stock Market Investing and the USD

Posted on 13. Oct, 2010 by in Forex

The forex market has a huge impact on corporate earnings and stock market investing.  If you are investing in the US stock market, the value of the United Stated Dollar (USD) is critical.  Here is what the Fed’s actions will do to you and how you can adjust your forex strategies in relation to this dynamic.

The Federal Reserve Bank is instituting a monetary policy of easy money, bringing down the value of the USD.  Their policy of quantitative easing, which basically amounts to money printing, is causing an uproar in the world financial markets.

When the value of the USD started to come down, this caused other foreign currencies to rise in value.  The Bank of Japan, for example, instituted their own plan to devalue their currency.  This caused investors to flee to the emerging markets.

This volatility in the forex market is causing the future corporate earnings of publicly traded companies in the US to be extremely uncertain.  Multinational corporations who have to juggle multiple currencies will have to hedge more risk then they are used to.

In addition, any gains in the US stock market must be adjusted with any losses in the value of the USD.  If the US stock market rises 7% but the USD goes down 6%, which it did, you only gain 1%.  That is a very low yield.  This is the reason why investors are running to emerging markets, and the cycle begins again.

It’s a very volatile time to trade in the forex market.  If you are an advanced day trader, the volatility might be heaven sent.  But if you are new to forex trading, this may be wipe out your trading account.

This may be a good time to do forex options trading instead of entering open trading positions.  This will limit your losses to your premium if your trade goes sour.  There is an upside limit as well, but this may still be the wisest move.

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