Dollar Pressured by Economic Growth

The US dollar fell after data showed that the US economy grew during the third quarter for the first time in more than a year. The data spurred a rise in risk appetite putting downward pressure on the greenback. US GDP figures spurred optimism about global economic recovery prompting investors to seek out higher yielding currencies such as the Aussie and Kiwi dollars.

Better Than Expected GDP Figures

During the July to September period the US economy grew 3.5% exceeding expectations of 3.3%. Brian Dolan of Forex.com stated, “It’s definitely all about GDP. The correction that we’ve had over the last few days, some people are looking this as a buying opportunity to get back in risky trades and sell the dollar on a bounce.” In recent days disappointing data on both the US consumer and housing sectors had spurred a sharp fall in stock markets triggering demand for safe haven assets like the US dollar and the Japanese yen.

Rise in Carry Trades

Third quarter GDP figures have triggered a rise in carry trades. Michael Woolfolk of Bank of New York Mellon said, “With Q3 GDP living up to its billing this morning, players are returning to the carry trade again, driving the dollar and yen decidedly lower.” Carry trades are usually defined as selling low yielding currencies in favor of higher yielding ones in this case the sale of US dollars and yen in favor of the Aussie and Kiwi dollars.

Fewer US Unemployment Claims

On Thursday afternoon the euro gained 0.9% and traded at $1.4846. For most of the past year the euro has been a barometer for risk sentiment rising on positive economic data. Also lifting risk appetite were figures from the US showing that unemployment claims fell to the lowest in seven months. Boris Schlossberg of GFT stated, “The (jobless claims) figure remains above the 500,000 barrier and until it drops below that level the market will not be fully confident that the recovery has taken hold.”

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Dollar Hits 14 Month Low-Again

After a slight rally last week the US dollar vs. the euro fell once again to a 14 month low on concerns that the US will keep rates low in the near future. Investors and forex traders are waiting for the results of the meeting of European finance ministers and European Central Bank officials scheduled for later in the day in Luxembourg. Forex traders will watch for comments regarding the strength of the euro which is trading just below the $1.50 level.

Replacing the Dollar

The US dollar has been pressured by investor concerns that the U.S Federal Reserve will keep interest rates to near zero well into 2010 and calls for the replacement of the greenback as a reserve currency. Marcus Hettinger of Credit Suisse in Zurich stated, “The trend clearly is for a weaker dollar due to a lack of interest rate support for the U.S. currency, the U.S. budget deficit and of reserve bank diversification flows into other currencies, like the euro.”

Finance Ministers and ECB Meet in Luxembourg

This year the euro has gained almost 7% against the dollar. Last Friday Eurogroup Chairman Jean-Claude Juncker said that a continued rise in the euro could slow Euro Zone recovery. ECB President Jean-Claude Trichet supports the US government’s policy of a strong dollar. In a note JP Morgan analysts said, “Euro area finance ministers meet today and may talk down EUR/USD, but as the decision is ultimately the ECB’s (which eschews this tactic), any down move in the currency should be brief and shallow.”

More Third Quarter Results

Equity markets are awaiting third quarter results from many US companies including giants Apple Inc. and Texas instruments. Many Forex experts believe last Friday’s dollar rally was prompted by third quarter losses by General Electric and Bank of America which triggered a rise in risk aversion benefiting the US dollar. Most currency traders did not believe the dollar’s rally was sustainable.

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Stocks Fall GE and BOA POst Weak 3rd Quarter Results

The US dollar pulled back from a 14 month low against the euro as global stocks fell and weak third quarter results from General Electric and Bank of America caused a rise in risk aversion. General Electric posted a 42% drop in profits and Bank of America reported a quarterly loss. Despite the fact that JP Morgan posted strong results on Wednesday expectations were dimmed by Friday’s equity market performance. Philip Lawlor of Nomura stated, “JPMorgan set the hurdle rate very high, and at the margin it’s difficult for the banks - you saw it with Goldmans yesterday - to now come in and have the same type of positive reaction.”

US Consumer Sentiment Falls

Traditionally when stocks decline dollar demand rises as risk appetite fades. Paul Mackel of HSBC in London stated, “Equities are looking a bit shaky and it’s the end of the week. So put the two together and the dollar is biased to the upside.” US consumer sentiment fell in October on concerns that the ‘dismal’ state of personal finances may not recover swiftly from the worst economic crisis in decades. Shaun Osborne of TD Securities in Toronto said, “It’s not a particularly good report as we saw a big drop in the outlook. It’s a case of poor data hurting equities but supporting the dollar in a risk-off and risk-on mentality.” The Reuters/University of Michigan consumer survey said that consumer sentiment fell to 69.4 down from September’s 73.5. The dollar index which usually rises when risk appetite declines rose to 75.68.

Canadian Dollar Declines vs US Dollar

The euro vs. dollar exchange rate was down 0.5% to $1.4872 and against the Japanese yen the dollar gained 0.6% trading at 91.09 yen. After reaching near parity with the US dollar earlier in the week the Canadian dollar fell to 96.14 U.S. cents. The decline was caused by profit taking on high yielding currencies after Friday’s bad economic news.

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Forex trading has become very popular during the past decade. During the current recession many investors have realized that forex markets still offer incredible opportunities despite economic difficulties. For would be forex traders just starting out a reliable forex broker is essential. Forex trading is high risk and is not suitable for the faint of heart. Finding the perfect forex broker can be a daunting task but successful forex brokers share many characteristics in common.

1. Reputation

This is probably the most important consideration for any investor. A reputable forex broker will be registered with the National Futures Association and the Commodity Futures Trading Commission. Forex brokers registered with these agencies must provide transparent financial records and can be fined or terminated if the broker fails to provide these records.

2. Trading Platform

The broker should be able to provide a trading platform that is easy to understand and use. The more features available to the investor the better. Most reputable forex brokers offer demo accounts using the same trading platform used for real trades.

3. Leverage

The forex broker should be able to provide the investor with several levels of leverage. Since forex trading is volatile and high risk the broker should not pressure the investor to use excessive leverage.

4. Mini and Demo Accounts

Many forex brokers offer both demo and mini accounts for those unfamiliar with forex trading. Novice traders should use a demo account to familiarize themselves with how forex trading works before investing real money. Mini accounts offer the new forex trader the opportunity to trade without incurring huge losses. Reputable forex brokers will provide both of these services.

5. Customer Service

A good forex broker should be able to provide 24 hour customer service. The customer service should be responsive and be able to answer questions the trader may have. Forex trading hours vary depending on what currencies are traded and the volatility of forex markets make 14 hour customer service a must.

6. Initial Deposits

Most reputable forex brokers do not require huge initial deposits. Investors should be wary of any broker who requires many thousands of dollars to open an account.

7. Currency Pairs Offered

Most reputable forex brokers have an extensive selection of currency pairs to trade. Currency pairs react differently to market conditions and it is important for the new trader to have a good selection of currency pairs to choose from.

8. Transaction Execution

How swiftly does the forex broker execute orders? Does the broker offer automatic execution? Due to rapidly changing and sometimes volatile market conditions the speed with which a transaction is made can mean the difference between profit and loss.

9. Spreads

There are several questions new forex traders should ask the broker. How tight are the spreads and are they fixed or variable? Some forex brokers make their profits by spreads alone.

10. Insured Funds

New investors should ask whether their funds are insured and kept separately from the brokers operating expenses. Most reputable forex brokers have clear policies.

While this list is by no means complete it contains some of the most important characteristics new forex traders should check when selecting a forex broker.

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Investing and Gambling Similar

Many have compared investing to gambling and in many ways they may be correct. Playing poker and investing have many similarities. Some kinds of day trading involve considerable risk and the forex market is extremely risky and volatile much like a game of poker. Poker is probably the most popular game of skill and it comes as no surprise to find that many poker players also trade on forex exchanges. Poker tournaments are routinely broadcast on ESPN and many poker players have become household names in the US.

Discipline and Adaptability

Poker playing and forex trading require very similar skill sets. For example poker players must be very disciplined with nerves of steel. This characteristic is also the hallmark of a successful forex trader. Poker players and forex traders are methodical and not given to emotional responses to adverse situations. Poker players and forex traders are amenable to change and the forex market is constantly changing much like the cards in a game of Texas Hold ‘Em. Both must have the ability to adapt to sudden changes and the sudden rate changes of the Fed can have the same effect as a newly dealt card.

Logic and Reason

Poker players and successful forex traders have the ability to make quick decisions based on logic and reason. Typically emotion does not play a part in the decision making process. Both must be able to withstand losses without emotional reaction. Just as poker players do not win every hand forex traders may experience sudden losses due to rapidly changing market conditions. Forex traders and poker players are resilient and have the ability to bounce back after sudden losses.

Long Term Results

Forex traders and poker players focus on long term results. Just as chips accumulate so do pips. Poker players and forex traders are usually confident people. Forex trading can easily be as volatile and ever changing as a game of poker and both require a high degree of confidence. Given these similar characteristics it would not be surprising to learn that many top poker players also trade forex!

Quick Forex Tip: A great deal of education is required for success in foreign currency trading. There are several excellent training programs available online. Many of these free courses are written by highly successful forex traders and can provide the novice with invaluable information. Additionally, many forex trading firms offer demo accounts where newbies can trade in real time and use varied amounts of leverage. Demo accounts can help new investors to get the ‘feel’ of foreign currency trading markets.