A weak dollar is not necessarily bad. Here are some simple tips to help traders
The dollar has become an outlier in the global markets. While everything else in the financial markets is going up, the dollar is currently at a 3-year low against the major currencies. As shown below, the dollar index is currently at the most oversold territory since July last year.
The dollar has weakened because of several factors. First, the economies of other countries that constitute the dollar index have strengthened. The Euro, which has been a drag for years has performed well with the improving European economies.
Secondly, the new American president favors a weaker dollar as a way of helping bridge America’s trade deficit which continues to increase.
So, how do you trade the weak dollar? And which benefits come from?
Short the Dollar
As a trader, you can short the dollar and benefit from its weakness. The concept of being short an asset is simple: you are simply borrowing an asset, selling it and waiting for its value to depreciate. When it falls, you buy back and return the same amount of the assets to the person you borrowed from.
You can short the dollar by selling the dollar index. This is an index that weighs the total value of the dollar against the top liquid currencies. It is usually provided by most brokers, including DTTW.
The second way is to find other dollar currency pairs and short them. To do this, you need to look carefully at the other fundamentals of the other currency and the underlying economy.
Buy Crude Oil
The weakening dollar has also led to a surge in crude oil. To new traders, the relationship between the dollar and crude oil seems farfetched.
However, you need to know two things.
First, crude oil is the most traded commodity in the world, and it is quoted in dollars. Therefore, when the dollar falls, crude oil tends to go up as more people move to buy the crude oil.
This also applies to other dollar-quoted commodities like corn and soybeans.
→4 Steps to really Improve Crude Oil Trading
Another way to trade the weak dollar is to buy gold. As We have explained multiple of times before, gold is mostly bought by central banks. For investors, it is used as a store of value.
Therefore, when the world seems to come to an end, they rush to buy gold, which they consider the safe haven. As a result, a weaker dollar often leads to a stronger gold.
Therefore, as a trader, you can invest in gold and benefit with weaker dollar.
As We have mentioned, investors tend to value gold as a safe haven. When the dollar is weak, and at a period of low interest rates, a weak dollar opens trading opportunities to many American stocks.
Exporting companies like Boeing, Caterpillar and Proctor & Gamble, do well in periods of a weaker dollar because their products become cheaper. As we have seen in the past year, Caterpillar, Boeing, and Apple have performed very well aided by a weaker dollar.
→Six Fundamental Informations to Look at When you invest in Stocks Companies
Another way to trade the weaker dollar is to go against the wave. By this, we mean that you should take the long-term perspective and invest in the dollar. This applies to when you strongly believe that the dollar is undervalued.
By being contrarian, you will definitely experience some losses. But, if your thesis is correct, you will be rewarded by a surging dollar.
In other words, the dollar is the most important currency in the world. Questions about its dominance have puzzled investors for decades. Some people have written books questioning the hegemony.
If you believe the end of the dollar is near, then you should use the four steps we have outlined. If you like swimming against the tides, you should not be afraid of trying the final idea.
External tips to help you in trading a Weak Dollar
- Strong Dollar vs Weak Dollar - TheBalance;
- Another interesting reading on Investopedia;
- Watch Out for a Weakening U.S. Dollar - Morgan Stanley