The U.S. dollar is considered a "safe haven" currency because it is the world's reserve currency. The Dollar Index contract is traded on the New York Board of Trade. It is traded as a single currency but the actual value of the dollar is based on a basket of currencies. What does this mean in actual trading? Traders usually decide to buy or sell a given currency based on the strength or weakness of the underlying economy for that currency. So when we see a headline: "Pound hits 23 year low on Dollar" it means that on a relative basis the pound is weaker than the U.S. dollar.
You could infer from this headline that the British economy is weaker that the U.S. economy and is the reason why the British pound is the weaker currency.
Trading in the currency markets, however, is not always as clear cut as this example. A host of complex variables go into determining a country's currency including the country's political and financial structure, who the leaders of a given country are and most important what is actually happening within that particular country's economy.
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Reader Comments (Page 1 of 1)
1-24-2009 @ 10:26AM
Dan Barnett said...
Was there supposed to be a 2nd half to this post?