Is it time to hedge your USD exposure?
USD/CHF, EUR/USD and GBP/USD have all recently experienced historic price extremes, and there has been continued weakness in the dollar across the board. UUP, an ETF tracking USD against other major currencies, is down 10% from its 2022 highs last fall; the index fell 3% in the last week alone.*
Effect on commodities
Crude oil
Looking into the recent rally in crude oil, prices are up $4.35 in USD and €1.93 in EUR in the last week.* About 3% of this increase can be attributed to its USD component alone - meaning a 3% premium for consumers who have not completely hedged their US dollar exposure.
Gold
Similarly, a discrepancy can be seen in gold prices quoted in EUR and USD. In the graph below, the past week has seen gold simultaneously go up $48 in USD (black line) and down €8 in EUR (red line).
Historical Gold Prices in USD and EUR
Hedging USD using forex
Foreign exchange markets allow traders a direct way to hedge against USD; traders can benefit from lower capital requirements and multiple avenues of diversification as well.
Currency pairs are offered in lot sizes as small as 0.01 lots, roughly $1,000 in notional value, which allow traders to specify just how much notional exposure they want from their hedge. With leverage, traders can also access greater notional exposure - margin rates are as low as 2% in pairs like EUR/USD. However, there are still risks associated with utilizing leverage to that extent, as losses can far exceed initial investments.
Traders can also diversify their exposure across currency pairs to hedge USD. Instead of simply hedging with EUR/USD, traders can replicate the same dollar exposure across currencies like GBP, JPY and CAD - essentially creating a curated dollar basket.
How to trade US dollar
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions on USD pairs
Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.
Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.
*Source: dxfeed.com - all data as of 12:00 ET 7/13/23
This information has been prepared by tastyfx, a trading name of tastyfx LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. tastyfx accepts no responsibility for any use that may be made of these comments and for any consequences that result. See our Summary Conflicts Policy, available on our website.
