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Educational Article

Currency Trading Simplified

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"When you are a hammer, everything looks like a nail", or so said behaviorist Maslow. I don't know about you, but I tend to view everything through the eyes of a stock trader engaged in equity markets. It's a pretty limited field of vision.

I see the equity market as a certain size. The gold market is a certain size. The real estate market is a certain size. The oil and auto markets are certain sizes. Futures, commodities, you name it. Most of us would view the equity markets as the King Kong of the investment world, as that is our reality day in and day out. We look at it as the grand arena in which we earn a living or at least trade for supplemental income.

Talk is always of the Dow, the S&P, the NASDAQ, or certain sectors therein. CNBC, The Wall Street Journal, and most of our news services focus on those, which become the limits of our financial vision. Big and immense, equity markets are our financial universe and we are equity-centric.

Let me open up another universe - a financial Big Bang that was a shock to me, and perhaps will be to many of our faithful readers, as well. Currency markets are the biggest markets in the world and make us equity Gulliver-types more like Lilliputians by comparison.

It's not that we don't already know this or maybe have even heard it before. It's that we never think about it. There is a whole 'nother world of finance out there that we seldom see - a world so vast, with never-ending liquidity, and which actually influence worldwide equities to boot.

Just how big is the currency market? For a point of reference, consider that the entire U.S. economy is a whopping $12 trillion (with a "T") dollars. The currency market by contrast trades $1.2 trillion (also with a "T") per DAY.

If your reaction to its vastness was a great as mine, our collective voices are probably saying, "Whoa!" Flat-Earthers, meet Chris Columbus! Yep, a whole 'nother universe! It's also a reminder that there's more to trading than just equity markets, and perhaps as lucrative for those who care to engage in it.

Let me paint a broad scenario, which is by no means the be-all, end-all for currency markets. But it simplifies the issue. It boils down to two major currencies vying for economic dominance. The U.S. dollar and European euro. Sure, there are Yen, Yuan, Pesos, British Pounds, etc. But the real global action is with the dollar and the euro when engaged in international trade. These two are going to fluctuate with each other with the dollar being on top at times and the euro battling back in relative strength at other times.

Right now, I believe we are in an era that will see the dollar weakening against the Euro, as it has been doing for roughly 6 months now. I believe there is more downward pressure on the dollar to go, which will make the euro a better bullish trade for months, but perhaps years ahead. This not based on the immense strength of the euro, but rather the inherent weakness of the dollar.

Let me make a short case for the continued weakening of the dollar. First, there's this little thing called foreign investment in U.S market more commonly know as foreign ownership of U.S. bonds - that is money lent by foreigners to the U.S. Treasury to help it meet its outstanding obligations. This also stems from U.S. trade deficits that exceed 5% of GDP. In other words, we're consuming more goods of foreigners than they of ours. Congruously, we ship them more money in exchange for the goods than they ship to us. What results is an excess of dollars that foreigners begin to stockpile.

What to do with all that cash? Invest it, of course, most likely into the safest vehicle available, the U.S. Bond and Treasury market. But is it that safe? The kindness of strangers may be wearing thin, as government spending deficits mount, Americans borrow more money that they do not have to buy goods that they do not need. Eventually, Americans will stop consuming, as they have already begun to do in recent months, which will, in turn, slow demand, which will slow production, which will slow profits, which will slow debt repayment, and so on in a downward domino spiral.

Of course, this raises a U.S. employment issue. . .how to keep Americans working so they can keep consuming and spending and servicing debt. Well, to keep them employed, someone has to buy the goods and services they produce, which means keeping them affordable. While we can't export a haircut to China, we can sure export a car to India - a car someone or many here have to make. By reducing the value of our currency here in comparison to other currencies, we keep our goods competitive and give other countries a pricing reason to discriminate on our behalf, which keeps us employed.

But that raises yet another issue. Other countries also see reducing the value of THEIR currency as the ticket to keeping their citizens employed. Hence, we have a case of competitive devaluation, which only forces the dollar down further. So much for the "strong dollar" myth.

Add to this the Fed Governor, Bernanke's stated objective of using the printing press to flood the market with credit in the form of dollars, and we have the real prospect of foreigners realizing just how IN-valuable dollars are and perhaps selling them off in favor of another currency. . .the euro perhaps?

There you have it the case for a continuing weak dollar. Will it be that way forever? No, except perhaps with gold. But compared to other currency, the dollar could have some room to fall.

So how do we trade currency disparities short of opening a trading shop under the Forex? It just so happens that the average Jane and Joe can open a bank account right here in the U.S. denominated in currency other than the dollar! Yes, we can have a bank account in the U.S.A. denominated in euros if we like. While this is not an advertisement for the following institution [standard disclaimer: we have no interest in the following company and do not vouch for it; break glass in case of fire; do not eat yellow snow; etc.], Everbank is one source of such an account. There may be others but I don't know about them.

http://www.everbank.com/

Click on the World Currency accounts. You can opt for CD's that tie the money up for a period of time and earn you some interest at a better rate than you can get in a U.S CD. Or you can open a basic account in euros, British pounds, or Swiss francs, that you have access to anytime. The account is FDIC insured, but does NOT insure against currency losses should the dollar actually rise in value. Entry cost is about $2500 for most accounts, but up to $20,000 for some specialized accounts.

There you have it! We don't need to be high-powered currency traders to take advantage of a weak dollar. All we need is a bank account denominated in a foreign currency to hedge against a falling dollar.

Of course, questions and comments always welcome!

Until next time make, make a great weekend for yourselves!

Buzz



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