How Does Global Competitive Devaluation Benefit the Dollar?

Shrinking dollar

It’s been very obvious in the past few years, that in the shadow of the global crisis, a great many countries have taken an extremely hard stance in regard to the valuation of their currencies. It’s been described as an ‘every man for himself’ type of scenario, where policies introduced by ministers serve only to make the situation worse for everyone. Some countries are benefiting from this however. In particular, many experts believe that the strategy of devaluing currencies across the world has helped the dollar to some extent.

The idea behind devaluation is of course that it helps to boost exports and decrease imports. This should in theory stimulate the economy. The problem is that when a great number of countries do this, trade is impacted very negatively, and ultimately nobody benefits.

The simplest way in which countries can devalue their currency is to sell it off. South Korea recently bought $1 billion in foreign currencies in order to halt the rapid increase in the won’s value. Switzerland has also recently made sure that the franc tracks the euro at 1.20 in a bid to keep exports strong. This is of course a lot easier than attempting to raise value, which requires the sale of held foreign currencies or bank borrowing.

One very obvious statistic that reveals just how prevalent devaluation is, is that according to the IMF, the total amount of foreign reserves held in the world’s central banks has grown by almost $4 trillion since 2007.

Competitive devaluation is limited in terms of the length of time it will be effective for. This can clearly be seen with Japan, who have recently struggled to keep the yen from rocketing. As the measures have failed to provide a long term solution, some Japanese ministers, including the Prime Minister, have accused the US and Eurozone regulators of exasperating the situation by lowering their own interest rates. The US argues that its aim is simply to boost the economy, and that devaluation of the dollar is not desirable.

All of the devaluation attempts create opposition between currencies, and each will react accordingly, with everyone losing out. The issue however is that the dollar dominates world markets to such an extent that it is very difficult to devalue competitively. There are too many market players.

So how does all of this benefit the dollar? Unpredictable and widespread devaluation can potentially make investors of all scales nervous. With the dollar the currency most resistant to devaluation, it becomes somewhat of a haven. This trend should continue for a while yet, with no real competition coming from the currency of emerging countries such as China and Brazil. Your forex trading account is unlikely to offer the CNY or BRL, simply because the Chinese market is too strictly regulated, and Brazil’s currency is nowhere near stable enough. As long as the rest of the world continues to competitively devalue currencies, the dollar should remain dominant.

 

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Dutch Minister Dijsselbloem Elected New Eurogroup Head; Signals Long Term Policy Making

Jean-Claude Juncker

Jean-Claude Juncker has been replaced as head of the Eurogroup by Dutch finance minister Jeroen Dijsselbloem as we see increasing sings of a European recovery effort; though crisis management isn't his main focus.

Dijsselbloem, aged 46, has been the Netherlands' Finance Minister for two months prior to taking up the role as the head of the informal association of the 17 single currency ministers. He will continue his role within the Dutch government, and is expected to hold the position of Eurogroup head for a period of 30 months.

His appointment will not come as a surprise, as he was widely supported as a candidate, not least because the Netherlands is one of the few European countries to have maintained its high credit rating throughout the Eurozone crisis. A German source did however reveal that Spain had opposed Dijsselbloem's appointment, likely due to his known tough stance on spending.

Wolfgang Schaeuble, Germany's Finance Record has been a clear advocate of Dijsselbloem's leadership for quite some time, though the French finance Minister Pierre Moscovici has made it clear that Juncker will be a tough act to follow, having maintained an excellent level of equality between Eurozone members. In particular, Moscovici highlighted the need to ensure the views of France and Germany remain balanced.

The Netherlands, France and Germany have all taken a hard line in respect to the austerity measures imposed on struggling economies such as in Greece, Portugal and Ireland. 

Some may argue that Dijsselbloem's task is somewhat easier than Juncker's was six months ago, when there were prospects of Spanish and Italian bailouts, and of course the worry of Greece leaving the Euro. The Dutchman is however, focusing his efforts on the mid to long term rather than assuming the role of crisis resolver. His main goal is to ensure that Europe remains competitive in light of emerging economies elsewhere. Primarily, he wants to do this through growth, better fiscal discipline, and by cutting the levels of unemployment, especially among the young.

Dijsselbloem's appointment seems to have had relatively little impact upon the forex market, as the Euro is being overshadowed by the current European Stability Mechanism talks, including the issue of financial transaction taxes. Cyprus asked for a bailout in the summer, but this hasn't yet happened, and some ministers are questioning whether it should happen at all. According to CMC Markets, it is believed that Greece has secured another instalment of aid, and that there will be an agreement to implement a plan for tax on financial transactions.

It seems as though Dijsselbloem's leadership heralds a slightly new direction for the Eurozone finance ministers. The single currency certainly isn't out of the woods yet, but there are signs that policy is being developed that goes beyond the current crisis. With many European economies on the mend, it's time to turn the attention to the future of the single currency, and how it will remain competetive.

 

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Who's Who in Forex: Victor Riesco

Victor RiescoVictor Riesco is a rising star as a financial analyst and professional investor. Victor is from Santiago, Chile and the owner of Global Trader, a brokerage and trading company he established for Chilean investors. GlobalTradingPad.com is Victor's website where he dispenses market commentary and trading and investment recommendations on stocks, indexes, commodities, precious metals and Forex.

Being the owner of Forexturtle affords me the opportunity to meet a lot of people in the Forex business. Victor Riesco is one of the keepers. You can tell from just one visit to his site that he is clear thinking, thorough, and professional. He has understanding of fundamental, technical and intermarket analysis - while most trading professionals tend to lean on their knowledge of just one of those disciplines. This knowledge, combined with his global perspective, uniquely positions Victor as a financial analyst.

So if you are looking for no-hype, no-nonsense trading advice or a live trading room where you can get some hand-holding while you hone your trading skills, you should visit Victor's website, GlobalTradingPad.com, and give him a try.
 

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TurtleVision Trading Workshops About To Launch

TurtleVision Trading WorkshopsWe are about to launch our TurtleVision Trading Workshops later this month. The workshops will be held on Saturday and Wednesday mornings.

Saturday mornings will be a 90-minute live interactive training webinar where we will conduct a top-down analysis on several key currency pairs for the upcoming trading week. You'll learn to understand the market through the prism of price action; how to more accurately determine current market conditions; and how to develop sensible trading plans while keeping a watchful eye on the fundamentals.

On Wednesdays we will follow up on the same currency pairs introduced on the previous Saturday. We will dig a little deeper into the lower timeframes to uncover the live trading opportunities that might exist.

The main focus of both sessions will be to teach price action principles in theory and practice. Saturdays you get the overview and theory and Wednesdays -- the practice.

This workshop is definitely not for novice traders, but if you've been trading for a while and you are familiar with the basics, then it might be what you're looking for if you want to learn:
  • how to use price action to understand the market
  • how to recognize the patterns that bank and hedge fund traders look for
  • how to determine the current market conditions like a pro
  • how to develop trading plans that make sense
  • how to find hidden support and resistance levels professional traders know about but you don't
  • how to utilize fundamentals to enhance your trading success
A couple of things to note. There will be no trading signals; no entry or exit points; no recommendations on what to trade. The objective is to get you to understand how to trade so you can make those decisions on your own.

This will not be your daddy's Forex training session. We're going to move fast and try to cover as much ground as we can. So if this sounds like your cup of tea, check back next week for more details.
 

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Forex Trading Volume Drops for First Time Since 2009

Forex volume down

NEW YORK—Global foreign-exchange trading volume dropped for the first time since the financial crisis, according to data released Monday by four major central banks.

Average daily trading volume in October totaled $3.470 trillion in North America, the U.K., Singapore and Australia, which combined account for most of the world's foreign-exchange activity. That is down from $3.474 trillion in April, according to reports from central banks in the U.S., U.K., Australia and Singapore. It was the first sequential drop in the semiannual survey since April 2009, though volume was still up 15% from a year earlier.

Read the full story at WSJ.

 

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