Global trade is done in dollars and the US dollar is just one of the currencies, alongside the Euro, British Pound, Japanese Yen, Australian Dollar, Swiss Franc, and Norwegian Krone, that are used to buy goods and services around the world. As time goes on, however, the dollar has suffered from a sharp loss of value. Today, as this article will show, the dollar has experienced a volatilized recovery and is doing quite well in recovery.
Nevertheless, there is another way to look at the paper value of an American dollar. Now, rather than focusing on its value as it passes through our currency exchange system, the best way to assess it is how a dollar changes with respect to other currencies.
This is called “Forex” or the Foreign Exchange Market, and the US dollar is tracked by a major currency pair, such as the EUR/USD or the USD/JPY. The large currencies typically have an inherent inverse relationship with each other, and when one does not appreciably rise or fall, the other usually does not either. This relationship is most often associated with the Shiller P/E ratio.
The Shiller P/E has had an upward path in more recent years and has often shown evidence of a 10% gain in value at various times in history as a result of numerous financial events. Thus, the USD/JPY or the EUR/USD is a reliable gauge of where the dollar is today relative to other major currencies.
When the USD/JPY is in a downtrend, then the dollar should be falling relative to the USD/JPY. If, however, the two currencies are in an uptrend, then theUSD/JPY must be going up.
Today, the US dollar has experienced a volatilized recovery and is doing quite well in recovery. However, there is another way to look at the paper value of an American dollar.
For example, consider that as recently as August of 2020, the USD/JPY was in a downtrend and the two currency pairs were going in opposite directions. Then, at the start of July of 2020, the USD/JPY had recovered from its downward downtrend and the two currency pairs had ended up close together in terms of price and terms of value.
This time around, however, the two currency pairs have moved apart and have moved closer together again. This time, therefore, the USD/JPY will be more value-oriented and less price-oriented.
In addition, the USD/JPY has experienced a volatilized recovery and is doing quite well in recovery. As a result, this time, the two currency pairs will be trading together in a different way.
This means that the two trade with each other, and this will affect how each will respond. So, it is more important to have a clear view of the currency pair’s behavior today.
If the Forex market is closed, then the most likely reason for a quick reversal in the dollar’s value will be the trade. As a result, if we know when each of these moves is likely to occur, then we can more easily make decisions about our trading.
Just keep this in mind as you start looking into the Forex market today. You may think you know where the dollar is heading, but chances are that another move may surprise you and be one of the most rewarding moves of your entire career.