The forex market is never the most stable or reliable entity, as its derivative nature is susceptible to volatility and rapid change. This was drawn sharply into focus recently by the Greek financial crisis, as a potential default by the stricken nation and subsequent negotiations with the International Monetary Fund (IMF) has caused huge fluctuations in the market.
This has triggered a difficult past week for the forex market, with the Euro gaining after months of decline after it was announced that an agreement had been reached between Greece, the IMF and a selection of European creditors. It subsequently pared against the dollar, while traditionally strong currencies such as the dollar and the pound have rebounded.
A Secure Haven in a Challenging Market: The Strength of the Dollar
In this respect, the last week has seen the dollar in particular emerge with its reputation as an investment safe-haven intact. Even though it may have edged away from the two-month highs recorded against the six major world currencies just weeks ago, it has remained on track to deliver a solid performance at the end of a turbulent 96-hour period. This has primarily been triggered by a shift in investor focus, as thoughts turn away from the Greek crisis and towards a proposed hike in U.S. interest rates.
This is to be expected, as investors cannot act authoritatively on the recent Eurozone events until the Greek authorities accept the terms of their proposed agreement and commit to tough austerity measures. Positive and robust data sets from an improving U.S. economy offer far more security to investors, especially those who are active in a volatile space such as the foreign exchange. With interest rates set to soar and the job market performing well, the USD / EUR is set for considerable games in the coming weeks.
The Bottom Line for Currency Traders
To support this, the dollar index was up by an estimated 1.5% at the end of last week while the Federal Reserve confirmed that interest rates would rise later in the year. Listed at 97.496 on the index and 0.2% down on previous highs, it is important to note that a subsequent break above 97.775 would recapture these gains and re-establish the dollar as the world’s primary currency.
In terms of basic forex trading, this is relatively good news at a time when the market is experiencing more pronounced volatility than usual. While the Euro may have pared and remains likely to fall further until a firm resolution is achieved in Greece, the Dollar and to a lesser extent the British pound have rebounded and create a strong option for investors. This is also good news for businesses, as it is likely to drive positive sentiment and create greater economic growth.