The world awaits a meeting of the US Federal Reserve Foreign as foreign currency rates are likely to respond directly to the actions of the Fed. After the credit rating agency, Standard and Poor’s, downgraded US debt two things happened. Stock markets around the world fell and US treasury notes were in such high demand at auction that the ten year bond went for 2.3% percent, the lowest in three years. Although there is general consensus that both the US and Europe need to get a handle on their debt there is also an underlying concern that a policy of absolute fiscal austerity would plunge the USA, and the world, back into recession. Forex traders and investors are therefore very interested in whether or not the Fed drops interest rates in order to support the US economy or leaves them in place. Foreign currency rates will likely respond the any Fed announcement although the direction of foreign currency rates is not all that certain. The surprising interest in US treasuries tells us that the US dollar is still seen as safe haven currency and that US treasuries are still considered a safe bet. According to press reports Fed chairman Bernanke has been preping the market for likely Fed moves. After an urgent conference call with G7 financial ministers the GA7 issued a statement saying they would take “all necessary measures to support financial stability and growth”. But what will happen to foreign currency rates is there is an Italian debt default?
The situation in Europe is probably bleaker than in the USA. Thus foreign currency rates that include the Euro will likely favor the other currency unless the EU can staunch the flow red ink in Italy, which is the newest nation on the continent to threaten sovereign debt default. The Greek debt crisis, in fact the PIIGS crisis (Portugal, Italy, Ireland, Greece, and Spain) has been brewing for over a year and has been a drag on the Euro. There is concern that if one of these nations defaults on its debt it could become contagious and there would be a round debt defaults across the globe. Foreign currency rates would become chaotic and, in all likelihood, favor the traditional safe haven currencies, namely the Swiss franc, the Yen, and, yes, the US dollar.
Watching short term foreign currency rates and trading with technical analysis as a guide can be profitable in foreign exchange trading and moves in foreign currency rates. For the long term traders need to look at the fundamentals and attempt to divine the intent of central banks, the US Federal Reserve, and national leaders as the debt crisis continues to simmer and threatens to boil over. A useful insight for traders is that while the S&P debt downgrade affected stock markets throughout the world it had an opposite effect on US treasuries and the US dollar. As civil war continues in Libya and threatens in Syria pro-democracy movements continue throughout the Middle East the world is a potentially unstable place and this will be reflected in foreign currency rates.
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