How to Buy US Dollars
FOREX.com May 6, 2022 8:00 AM
The US dollar has risen to its strongest level for two decades thanks in part to safe-haven inflows amid geopolitical tensions and fears of rate hikes from the Fed. Discover the different opportunities with the US dollar.
What’s happened to the dollar price?
The dollar has been in a strong uptrend in the first half of 2022, and the entirety of 2021. Year-to-date, the greenback has risen more than 8% against a basket of foreign currencies. It has done particularly well against the Japanese yen, rising some 13% to repeated multi-decade highs versus the currency. European currencies have also suffered at the expense of the world’s reserve currency. The pound, euro and franc have all dropped around 7-8 % each.
Please be aware that past performance is not indicative of future results.
What caused the US dollar rally?
The US dollar rally was mainly caused by a strong economic rebound from the pandemic and, more to the point, soaring inflation.
One of the main roles of a country’s central bank, in this case the US Federal Reserve, is to keep inflation under control around 2% and aim to keep employment steady by utilising the monetary policy tools at its disposal. These include changing nominal interest rates and buying or selling of government bonds and other assets, all to either increase or reduce the supply of money in circulation.
As inflation has been rising rapidly over the past year or so, the Fed and other central banks have been rushing to tighten their ultra-loose monetary policy stances, in order to avoid letting price pressures get completely out of control. To a great degree, they have failed to achieve this goal, given that consumer prices have reached 8.5%, which is the highest since the early 80s. There is a risk that prices could get even higher before easing back. Which is precisely why the market has lost some trust in the Fed and its Chair Jay Powell.
Expectations that interest rates will continue to rise in the US has caused the dollar to rise against currencies where the central bank is expected to keep interest rates comparatively lower. In other words, investors have been piling into the dollar to earn higher interest.
Opportunities with the US dollar
There are a variety of different ways to get exposure to the US dollar, here we’ll take a look at three of the most common:
- Dollar pairs
- The Dollar Index
USD pairs involve trading the value of the USD against another currency. So rather than just focusing on what is happening to the USD, you are doing so in comparison to another currency.
Central bank divergence has become a key theme in recent weeks as the Federal Reserve has adopted a more hawkish stance. This is in stark comparison to the BoJ which remains one of the most dovish central banks in the world. As a result, USD/JPY rallied to a 20-year high.
Meanwhile, the EUR/USD has fallen to a 5 year low of 1.0471 as the EUR is more vulnerable to the fallout from the Russia – Ukraine war than the USD and due to the less hawkish stance of the ECB compared to the Fed.
USD/CAD has traded relatively flat this year as the Canadian dollar has found support from surging oil prices amid the war and sanctions on Russian oil.
Some of the most traded USD currency pairs are:
The US dollar index, also known as the DXY, measures the US dollar against a basket of major foreign currencies. It represents the dollar’s value in global markets. The six currencies included in the basket are the euro, the Swiss Franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.
When the US dollar strengthens against the other currencies, the US dollar index rises, and when the US weakens versus the other currencies the DXY falls. Owing to the factors discussed above the USD has had an impressive start to 2022.
The US dollar index has rallied 8% year to date to a high of 104.06, a level which was last seen in 2002. Should the Fed press ahead with its more hawkish stance compared to other central banks and should geopolitical tensions boost safe haven flows then the DXY could push higher still.
See our guide to trading the US dollar index.
Given that gold is traded in the US dollar the two typically share an inverse correlation – so if the USD is rallying, the price of gold usually falls.
This explains why the precious metal has been unable to add much to its impressive gains made in 2020, even though many regard it as the ultimate hedge against inflation. By early May, when this report was written, the metal had given up much of its gains made between February and March and was up just under 3% in the positive territory year-to-date.
Gold has also lost out because it is a non-interest-bearing commodity. Unlike government bonds and stocks, it doesn’t give interest or dividends, and costs money to store.
However, the fact that gold’s price has been able to withstand the dollar’s impressive rally, goes to show that there must be at least some demand from those seeking to protect their wealth being eroded by inflation and from holding fiat currencies. For this reason, we remain cautiously optimistic on the outlook for the precious metal.
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