Currency traders need to understand their trade. This means understanding the different currencies. One of the most important currencies is the US dollar (called the USD in Forex trading) because it moves through the financial markets in every part of the world.

The US dollar is one of the strongest and most stable currencies in the world. One of the reasons for its strength and stability is the Federal Reserve Bank (also called The Fed), which regulates monetary policy, controls the supply of dollars, and determines interest rates. Central bank regulation is an essential factor in the stability of a currency and the Fed is one of the most active and independent banks.

The dollar is also strong and stable because United States is one of the world’s leading financial powers with a Gross Domestic Product (GDP) of US13 trillion, making it the world’s biggest economy.

The US is a predominantly service-driven country, with nearly 80 percent of GDP coming from the service sector. For this reason, the US is the biggest trading partner for many countries. In fact, the import and export volume of the US exceeds that of any other single country, representing twenty percent of total world trade.

The five biggest export markets for the US are:

1. Canada
2. Mexico
3. China
4. Japan
5. Germany

The biggest import markets for the US are:

1. China
2. Canada
3. Mexico
4. Japan
5. Germany

What affects Dollar Prices?

The value of the USD is very closely linked to the growth of US economy. Economic reports released throughout the month provide detail about the health and growth of the economy in the United States.

Interest Rates

Interest rates are the single most important factor affecting a currency’s value. Higher interest rates attract more investment, which causes the value of the currency to rise. Conversely, investors will sell (or avoid purchasing) currencies with lower interest rates. Investors tend to purchase currencies with higher-yielding interest rates.

However, the current rate of interest is not as important as the overall direction of rates. This is a much bigger question because it requires an investigation into the country’s level of growth and inflation, overall health and vitality, and political stability.

A Fed rate decision or announcement can move the USD in big ways. A decision to raise rates can cause the currency price to rise. A decision to lower rates can cause the currency price to fall quite dramatically. Even an announcement to maintain the current level of interest rates is monumental in the Forex world.

Employment Report (Nonfarm Payrolls)

This report measures the number of jobs created during the previous month. The employment report influences the dollar more than any other report released during the month. It provides a good measure of the economy’s health.

When jobs have been created, the dollar improves because it signals that the economy is healthy and robust. A weak employment report causes the dollar to fall. This report is released on the first Friday of every month.

International Trade

As stated above, the US has a large import/export sector. The balance of trade represents the difference between the amount of exports and imports of goods and services. Any improvement in the trade balance is favorable for the dollar.

A worsening of the trade balance (in which more goods are imported than exports) can cause the dollar to decline. This is because dollars need to be sold to purchase foreign goods. This report is released the second week of every month.

Technical Indicators: Support and Resistance

The strongest technical factor affecting the USD is support and resistance. Support is the level at which the bulls make the price move upward. When a support level is reached, the price will generally rise. Resistance is the level where the bears put downward pressure on the currency. When a resistance level is acquired, prices start to decline.

Charts clearly show these levels. A support level appears similar to a floor on which the currency rests. A resistance level appears like a ceiling over the currency price.

The price movement of the USD is strongly affected by these levels, particularly in the short-term. Although support and resistance are strong factors affecting the movement of the USD, these levels are often broken.

When to Trade the USD?

The USD makes its strongest movements during the US session, which runs from 8:00am to 5:00pm EST. This is when the US stock markets, bond markets, and commodities markets are open for trading.

Volatility will run high because of the different and competing pressures from the other financial markets. However, price movements will be strong and trends reliable.

Another good time to trade—in fact, some traders will only trade during this time—is during the US-European overlap session. This is the time that the European session is closing and the US market is opening. It lasts from 8:00am to 12:00pm EST.

This session is the most active session and volatility will run very high. ADX levels tend to soar. Trends will be strong but short.

EUR/USD Currency Pair

The USD is a reliable currency for trading. Many Forex traders focus solely on the EUR/USD currency pair. Because of the political strength and good central bank control in both the US and the European Union, this currency pair develops strong long- and short-term trends. It is also good for hedge trading.

The EUR/USD is a good currency pair for both novice and experienced traders alike. For traders with limited time, this currency pair is a good choice.