The Decline of the USD – What Does This Mean for Traders?

4 mins read

Historically, the greenback has always been seen as a powerhouse within the forex market, thanks largely due its status as the world’s largest foreign exchange reserve.

During the days of the Bretton Woods System (which ran from 1944 until the early 1970s), the value of most major international currencies were also pegged to the USD, and there’s no doubt that the dollar remains king in the global forex market.

However, the greenback has continued to weaken through 2021, amid falling benchmark yields and sustained economic uncertainty. But is this decline likely to continue, and does it create a unique opportunity for those interested in forex trading?

How has the Greenback Fared in 2021 and Why?

The depreciation of the dollar began towards the end of 2020 amid the coronavirus pandemic, with this trend exacerbated by general election uncertainty and talk of a significant stimulus package to help US firms and households.

This trend continued through Q1 2021, with the final week of March seeing the greenback falling by a further 0.6%. This caused the dollar to reach a one-month low, with the benchmark yield also declining by its biggest margin in five months despite relatively strong US data.

The safe haven dollar has remained broadly weaker through April to date, particularly as Treasury yields continue their incremental retreat.

This has come against the backdrop of a robust coronavirus vaccine rollout across the globe, with US President Joe Biden having pledged to deliver 200 million vaccine doses within the first 100 hundred days of his tenure (up from the 100 million he initially promised back in January).

This, alongside retreating case numbers and improved global growth forecasts, has helped to restore calm to the world’s markets and reignited demand for riskier assets, making the greenback far less appealing to investors in the process.

Is Now the Time to Start Forex Trading?

Of course, the sustained depreciation of the dollar has created more favourable exchange rates with other major currencies.

The Euro, yen and GBP have all made gains against the greenback through 2021 so far, for example, although the pound is doing much to give up its yields in the wake of its own macro and socio-economic challenges.

Commodity-driven currencies including the Norwegian Krone and the Australian dollar have also made sustained gains against the USD, with both assets holding on to sizable two-day advances according to recent market figures.

With reduced US yields likely to underpin similar trends in the near-term, the question that remains is whether now is the ideal time to get started as a forex trader?

In truth, this depends on your outlook and underlying trading strategy, particularly when you consider the robust nature of the greenback and its potential for future growth. So, if you’re a scalper or day trader who wants to profit from short-term volatility, the current market may offer a particularly interesting opportunity for investors.

Similarly, the decline of the dollar may encourage you to invest at least some of your capital of gold.

The reason for this is simple; as there’s usually a strong, negative price correlation between gold and the USD, so a weak dollar could well indicate that the value of gold will soar in the near future.

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