Why is the Dollar so Strong at the Moment?

Earlier this week, the Banak of England (BoE) sought to raise the base interest rate in the UK by 50 basis points. While this was below the forecast hike of 75 basis points, it still represents the largest such increase in 14 years and managed to split the opinion of those who decide monetary policy.

Of course, this has been done in part to help quell inflation, which remains above 9% and at a near 40-year high. This has caused the pound to fall against a basket of major currencies, including the Euro (EUR) and the US dollar (USD).

Of course, the strength of the dollar should also be considered here. But why is the greenback so strong at the moment, and how can you capitalise on this as a forex trader?

Why is the USD so Strong?

The value of the USD against the other seven major currencies has recently reached its highest level since the early noughties, even equalling the value of the Euro in August for the first time in two decades.

But what exactly is behind this trend? Well, the ongoing global uncertainty and threat of a worldwide recession is undoubtedly the primary trigger, with the dollar living up to its historical reputation as a safe haven for investors.

Aside from the global downturn, there are a couple of fundamental factors to consider. Firstly, the Federal Reserve in the US is currently hiking the base interest rate at a much quicker rate than other nations, making the greenback increasingly appealing to overseas investors (especially in the current economic climate).

It should be noted that the GBP/USD has recouped some of its recent losses after the most recent BoE base rate hike in the UK, as this has strengthened the pound significantly.

The sheer size of the US economy and downturn in the Eurozone (which has largely been caused as a result of the war in Ukraine and Brexit) also contributes to the relative strength of the USD, which has continued to outperform its rivals through 2022.

How are Traders Leveraging This to Their Advantage?

Ultimately, a strong dollar is good news for manufacturers, who can import materials cheaper and export goods at a higher rate of compensation.

This makes it overtly positive for the US economy as a whole, while traders are also able to leverage the strong dollar to their advantage.

On a fundamental level, the forex market is speculative in nature, with traders profiting by betting that a target currency's value will either appreciate or depreciate against another within a specific timeframe.

Timeframes can vary depending on your outlook and strategy as a forex trader, but there's ample opportunity to profit in the current market by backing the USD against an entire basket of major and minor currencies.

What's more, the USD is on one side of approximately 88% of all currency trades, so you can usually benefit from increased levels of volatility and liquidity in real-time.