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This rally in the U.S. dollar has been a bonanza for many Forex traders.
There have been multiple trading opportunities to trade the USD pairs for potential gains in the resulting volatility.
In times like these, it pays to revisit the fundamentals and have a sound trading strategy to position yourself to target potentially winning setups.
Let us understand why the US dollar is moving, and what we believe are some of the best currencies to pair with the USD for trading.
What’s Behind the Rise in Dollar?
Let’s first understand how the USD is affected by various factors. And to do that, let’s start with answering – why on earth is the dollar appreciating so much lately?
Now, there are many factors that move the dollar. (See here how you can trade these moves)
But the simplest answer here would be that the Federal Reserve is trying to fight inflation and to do that it is ramping up interest rates faster than most global economies in the world.
This might not be obvious at first sight.
But think about it this way – You’re holding wealth and you want to compound it. And more so now with the ongoing volatility and uncertain global environment.
So, many investors are now starting to park their wealth in the U.S. and they’re flocking to invest in the U.S. government bonds as they’re offering a decent return on investment than most other countries which are battling with slowdown concerns.
A 2-year U.S. government bond, for example, would have fetched around 0.7% in January 2022 and today it earns around 4.06%.
So, many investors are pouring their money into the U.S. And as this happens, the demand for the dollar balloons and that bumps up its value.
Let’s now see which currencies we’ve found pair well against the USD in this environment.
Best USD Pairs
High inflation and ultra-monetary tightening have caused global slowdown, supply chain bottlenecks, and risk aversion among many investors.
All of this favors the USD.
This is because the dollar has been known as a safe haven currency and it’s seen by many as a safer investment during times of economic and political turmoil.
Apart from the USD, the CHF and the JPY are also widely considered as safe havens.
On the other hand, the worst performing currencies in this environment are generally the commodity-linked currencies. These are the AUD, the NZD, and the CAD.
This is because the global slowdown weighs on commodity prices which is bad news for the countries that export them.
Here are 3 currency pairs that we consider best to trade against the USD:
EURUSD
The Euro and the US dollar represent two major economies globally, and as such, this is the most-often traded currency pair. Movements in the exchange rate for this pair are linked to central bank interest rate decisions of these countries and also the non-farm payroll announcements.
The pair is also preferred by many traders because it is highly liquid, comes with low spreads, and because one can place large volumes of trade with it.
USDJPY
The dollar is the most traded currency globally, while the Japanese yen is the most traded currency in the Asian market. Any central bank developments in these nations can spur volatility in this currency pair, which can present advantage to those who trade the volatility to target potential profits.
This currency pair is also preferred by many as it has one of the tightest spreads in the Forex market which reduces the overall cost of the trade.
GBPUSD
This pair is favored by day traders, who aim to take advantage of price fluctuations by trading in and out of the market at a quick pace. And for this reason, it is also considered one of the best forex pairs for swing trading.
The above pairs are also called “Majors” as these are generally the most popular types of currency pairs to trade in the Forex.
The majors have always had the U.S. dollar as one of the currencies and are generally the most liquid pairs, i.e. they provide the trader with the greatest ability to trade that pair on the forex market.
Trading Strategies for the Current Market
As we saw, the USD has been at the gaining end in the current market environment. Commodity based currencies, on the other hand, have been on the receiving end.
So, with a strengthening dollar, one of the trade strategies can be to look out for currency pairs that benefit from a rising USD to potentially target gains.
These would generally be the pairs where the other currency against the USD is a commodity-based currency or one that is depreciating in the current market.
Another way to trade major movements in USD pairs is to keep track of key economic announcements which might affect the value of the dollar.
These can be central bank monetary policy dates, inflation data releases, or non-farm payroll and unemployment claims data, because these events can affect the Fed’s stance on interest rate hikes which can further have an effect on the dollar.
Generally speaking, the best pair for you to trade is the one that you are most knowledgeable about and one that meets your trading and risk-reward expectations.
Our top analysts have been studying USD setups and their charts are showing a few exciting patterns. They say it’s the best USD trade they’ve found in Q2. Click here to join them LIVE.
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