The Wall Street Journal has a video wherein Treasury Secretary Timothy Geithner answers questions submitted by the Digg online community but asked by the WSJ interviewer. The questions had an angry town hall forum flavor to them but when Geithner answered a question about raising the mandatory federal deficit limit past $12 Trillion he did not blink. The days of Senator’s Everett Dirkson’s ironic comment, “A billion here, a billion there, pretty soon you are talking real money,” are long gone, unless you substitute trillion. So, what does this sort of monetary policy mean for the Forex market and Forex trading?
The dollar will go up, go down, or stay the same in relation to other currencies over the next years. However, there will always be swings along the way wherein lies Forex trading opportunity. It is the Forex expectation that drives the Forex market and trading in currency pairs.
When the previous Federal Reserve chairman, Alan Greenspan testified before congress the stock and currency markets reacted immediately to any voice inflection that implied a change in interest rates or modification of the federal deficit. Forex trading, likewise, responded to the Forex expectations.
Although the current Federal Reserve chairman, Ben Bernanke, is new on the job and not a legend yet, like Greenspan, his words still drive Forex and market expectations. Knowing when the Federal Reserve chairman will testify or when the Federal Reserve announces rates changes will mean you are ready to trade your chosen currency pair as the news comes out and Forex expectations are modified. Currency pairs will adjust and you can make your profit during the ensuing high trading volume.
The US economy is not going to collapse despite the huge addition to the Federal Deficit. In fact, if you believe Geithner and Bernanke, economic collapse may have been staved off by keeping credit markets open with the substantial amount of money poured into the system. The Forex expectation may well be a long term decrease in the purchasing power of the dollar and a long term decrease in the value of the dollar in relation to other currencies. However, no one knows how fast that will happen, or if it will. Forex trading profits are made as much by the contrarians as by those who follow the herd’s Forex expectations.
Forex trading still gets down to having a sense of what the currency markets are about and concrete knowledge of the currencies in which one trades. Then Forex trading has to do with your Forex expectations and how you read and anticipate the Forex expectations of the bulk of other Forex traders.
In the interview mentioned above Geithner is very critical of tax cuts in the face of enhanced benefits in Medicare and Social Security. He makes the point that the bailout money spent earlier this year needed to happen to avert economic collapse. If one’s Forex expectation is that Geithner and the rest of those formulating economic policy in the USA are serious about fixing things then we can expect to see them start to nibble away at the federal deficit. If that happens then Forex expectations will change and folks will start to buy dollars instead of selling dollars.