How you can make money out of the strong dollar

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Forex trading is the hot investment product of the moment, mainly due to the strength of the Aussie dollar. Here’s what you need to know about the Aussie dollar, the Euro and the US dollar before getting your toes wet.
The Aussie dollar is now sitting at around US$1.06 and has been for the past week.  An overnight rally sent it higher, to $US1.0658, its peak since last September.
Forex traders going ‘long’ on the dollar, that is, placing trades on the basis that the dollar will go higher, stand to make money as the dollar rallies. If it falls and they don’t change their strategy, they will lose money.
That’s what happened to some traders when the dollar fell to below parity (ie below US$1) late last year. According to Andrew Budzinski from eToro, traders who kept their long positions when the dollar started to fall last year, obviously lost money.
Savvy traders, who decided to go short when the dollar started to fall, did well last year.
So where to next for the Aussie dollar, the Euro and the US dollar?
According to eToro traders can expect the Australian dollar to continue to perform strongly. Our interest rates remain higher than those of many other countries and the commodities boom means the ongoing demand for our currency is “incredible”.
The inflow of imports means the Reserve Bank will have to keep interest rates relatively high to stave off the threat of inflation, and this is another factor in favour of the value of the Aussie remaining strong.
eToro doesn’t think even a 1% decrease in official rates would have much of an impact on the strength of the Australian dollar. In fact, it could strengthen demand for our commodities and further enhance the value of our currency.
There’s always a chance to make money by going short on the Aussie against the US dollar as it comes off any short-term peaks but overall the outlook for the foreseeable future is that there’s still room for the Aussie to move up and for traders to make gains by trading long.
If you’re interested in trading the Aussie against the Euro, eToro is predicting a short-term upswing in the value of the Euro based in what it sees as a short-term return of “positive risk sentiment”.
Even a Greek debt default would not see the Euro go too much lower, according to eToro. That’s because the risk of a default has already been price in to the Euro’s current value
However, the long-term view for the Euro is that its weakness, particularly relative to our dollar, will continue. And if you hold that long-term view, eToro says the Euro has already rallied from its lows by 5 cents this year so the time to go short may be just around the corner.
If you have the risk appetite to trade an Aussie/Euro pairing, eToro suggests trends will be dictated by the news cycle.
“Watch the headlines like a hawk. If you had’ve done that late last year you would have made lots of money.”
The best indicator of what’s going to happen to the US dollar next is the behaviour of US share markets. eToro says if you see US equities trend higher it’s a good indication that the US dollar will weaken.
-- By Jackie Pearson
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