Are Dollars Drying Up Globally?

The USD is the world’s premier reserve currency. It is also the currency of the world’s #1 economy, and many economies' dollar scarcity is an issue that hardly ever makes headlines, but now it is. As a binary options currency trader, any time there is a scarcity of Forex its perceived value appreciates. This is a basic construct of demand/supply. But the problem of US dollar scarcity is not something that is troubling the domestic economy, rather it is one that is affecting emerging market economies.

Several reports released by the IMF and the Bank for International Settlements highlight the same feature: there are fewer dollars in circulation in emerging market economies. This is especially troubling given the reliance of those countries on USD for balance of payments related issues, imports and exports, and purchases of dollar-denominated commodities. As a dollar trader, this ensuing scarcity will ratchet up speculation on call/put options in future markets.

Why is a shortage of USD troubling to the markets?

There are only so many places where international buyers and sellers can exchange foreign currencies for USD. These are known as pools. When there is a shortage of dollars, the number of pools begin to dry up. This is especially true in emerging market countries like Brazil, Russia, India, China, South Africa and the like. With USD sources now being tested, it is going to become increasingly expensive for foreigners to purchase USD. Back in 2008/2009 when the global recession hit, the Federal Reserve Bank boosted quantitative easing with trillions of dollars’ worth of asset purchases. Now, the Fed has a balance sheet of approximately $4.5 trillion. When the Fed adopted a policy of quantitative easing (QE), it accelerated the velocity flow of money through the US economy, and indeed through the developing world, many emerging market countries were heavily reliant – and still are – on this funding, to maintain liquidity in their central banks. When QE was in effect, asset prices increased and the costs of capital dropped dramatically around the world. QE is the opposite of quantitative tightening (interest rate hikes and asset sales). As soon as the Federal Reserve Bank begins to reduce its purchases of assets, we will see a rapid decrease in the supply of USD around the world.

What does this have to do with binary options traders?

As it stands, there is already a shortage of USD in global currency markets. The domestic economy has sufficient supply, but emerging market countries are the issue. When they don’t have the necessary dollars in banks abroad, foreign currency transactions and purchases of dollar-denominated commodities become difficult. That easy money that was available to so many is no longer readily available. There are many reasons why we could be seeing a sharp reduction in the number of USD in circulation abroad, notably tax reform.

If the Trump White House gets its way, trillions of dollars could be repatriated back to the US from foreign banks. This would dramatically reduce the number of USD in circulation. If these dollars already in USD, then their repatriation will affect foreign banks dramatically. Emerging market economies will likely feel the ill effects of the dollar cash crunch by 2018. As a trader, this will present an opportunity for going long on the greenback, and short on reciprocal currencies.

How is the dollar performing at present?

The USD/JPY pair is currently trading at 113.0000, the EUR/USD is at 1.0929, while the USD/CAD pair is trading at 1.3712. The vaunted US dollar index has slipped since 10 April 2017 when it was trading at around 101.01. It is now at 99.08 and in the upper range of its 52-week high and its 52-week low. If we look at recent economic indicators, the number of new jobs added in April bodes well for the USD. Recall that April figures (+211,000) were virtually double the figures for March, and the unemployment rate nudged down by 0.1% to 4.4% overall. This is the type of economic news that boosts the USD, and that’s why we have seen an uptick in the DXY since May 5, 2017.

• The Central Bank of Nigeria released $388.66 million to help stimulate economic activity to counter the dollar cash crunch
• The rebound in the USD was somewhat modest after the payroll and unemployment data were released on Friday
• The EUR/USD and the USD/JPY will likely retain their current highs, but that trend will be short-lived.

Within a month, the Fed will likely be announcing an additional interest rate hike. The federal fund's rate is currently in the region of 1.00% – 1.25%. There is currently an 82% likelihood that rates will rise by 25 basis points in June. Many of the Federal Reserve Bank presidents are of the opinion that accommodative policy in the US has run its course and that it is time for monetary tightening to take place.