FX Traders Look Forward to Currency Wars

The major international news outlets are focused on covering the war between Ukraine and Russia. But few are giving much ink to the potential currency wars that could set a long-term round of interest rate hikes in motion by multiple national banks. Both the US Federal Reserve and the CBR (Central Bank of Russia) have recently taken decisive action to shore up the dollar and the ruble. What will happen if other economic powers like Korea, Japan, and India follow suit? The result could be a financial battle, the likes of which have not been seen in recent times.

But for forex (FX) traders, the central issue is how such a war would play out in terms of changes in relationships between the dollar, yen, ruble, and other mainstays of the global FX marketplace. To make the most of the potential opportunities, FX practitioners should do their research and follow the daily announcements by major national banks. Additionally, it's wise to always read financial and economic news stories with one question in mind: how can this event affect the value of the foreign exchange pairs to trade?

Why Leverage Makes Sense

The main benefit of using leveraged trades in forex transactions is that it offers users the chance to control a large position for a fraction of the stated cost. As a rule, the majority of those who deal in equities, commodities, and other asset classes don't use leverage as much as FX enthusiasts do. Why does it sometimes make good sense to opt for 10:1, 20:1, or greater amounts of leveraged power when placing orders in currency markets? To learn more about how to navigate the mechanics of leveraged positions and get the most out of this kind of FX activity, review a thorough guide at https://www.avatrade.com/education/trading-for-beginners/guide-to-leverage, the educational section of AvaTrade's website. For one thing, you don't have to place much capital at risk.

For example, in a 20:1 arrangement, the buyer could control $10,000 worth of USD/RUB (the US dollar to the Russian ruble) for just $500. Of course, that's a hypothetical example and might not represent a good real-world transaction. The point is that leveraged trading puts the power in your hands. To defuse the risk of larger than normal losses if prices go sour, people use defensive strategies like precise stops and options contracts. FX can be as complex or as simple as you want it to be. Of course, some prefer to use little or no leverage, while others enjoy the action of taking larger positions and using as many defensive strategies as they can muster to avoid going into the red on a particular position.

Are the Currency Wars Underway?

As two of the world's major economic, political, and military powers, Russia and the US are currently on a round of currency improvement, meaning that each nation's central bank is apparently on a course to bolster the strength of the ruble and the dollar, respectively. In Russia's case, the circumstances are mostly related to the hostilities between the Russian and Ukraine armies and the widespread financial fallout for both countries. For the US, it looks like the Federal Reserve Bank (Fed) is set on hiking interest rates as a way to offset endemic inflation, which is running at about nine percent as of late Q2. Of course, the downside of whipping inflation is decreased growth. Because the US economy is one of the central engines of global growth, it sometimes happens that a slowing US economy causes a growth slowdown in other developed nations.

Opportunities for FX Traders

There's already evidence that a currency war is underway. What happens when successive nations raise interest rates to either dampen inflation or stall overheated domestic growth? Sometimes national banks raise interest rates to shore up their currencies and don't mind swallowing the pill of slow growth that typically comes with rate increases. As long as they can weaken inflationary pressure and bolster their currency, they follow suit with other countries in a round of racing to the top of FX valuations for their own currencies.

Forex practitioners who spend a few minutes or a few hours per day at their computers trying to decipher what's going on in global exchanges can gain a lot from a true currency war. That's because the FX game is all about making accurate predictions, and rounds of interest rate increases tend to have uniform results. Regardless, no strategy is foolproof, but it's safe to say that hikes by the US and possibly South Korea will be two of the opening salvos in what could be a summer-long war among the dollar, won, yen, ruble, euro, pound, and others.