How to short the US dollar
Shorting the US dollar means speculating that its value will fall. Here’s what you need to know about shorting USD, including what impacts the dollar’s value and the risks of going short.
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What does it mean to short the US dollar?
If you short the US dollar, it means that you believe its value is decreasing – ie you think it’ll fall. This is also known as ‘short-selling’ or ‘going short’. If your prediction is correct, you’d make a profit from this drop in the currency’s market price.
Basically, you’d sell the currency when the price is high, and buy it back when the price drops. You may be wondering how you can sell something you don’t own. Well, trading forex via CFDs never involves owning anything – it’s pure speculation on the future value of a currency. Therefore, short-selling the US dollar is speculating that its value will be lower at a future date.
Learn more about short-selling a currency
How does shorting the US dollar work?
Because all forex is traded in pairs, shorting the US dollar works by selling it against another currency in the hopes that its value will go down. In other words, you’re expecting that the USD will weaken against another currency.
In every forex pair, there is a base currency – the first currency you see – and a quote currency – the second currency you see. For example, in EUR/USD, the euro is the base, and the dollar is the quote. This means you can either short the dollar by selling a pair with USD as the base (eg USD/CAD), or you can go long on a pair that has USD as the quote (eg EUR/USD).
With us, you can short the dollar using CFDs. As these are leveraged products, it’s important to have a solid risk management strategy in place before you open a position, and to add stop and limit order to your open positions.
How to short the US dollar
Shorting the US dollar via CFD trading
Trading using CFDs also enables you to speculate on the US dollar, using leverage, without owning it. With CFDs, the size of a position is measured in contracts, and each contract is equal to a single lot of the base currency in the pair. A standard lot is 100,000 units of the base currency.
If you want to get exposure to a declining USD price using CFDs, you’ll sell a forex pair with the US dollar as the base currency or buy a pair with USD as the quote. Your profit or loss will depend on the outcome of your prediction. And remember, because you’ll use margin to open your CFD position, it’s important to take steps to manage your risk.
Why would you short the US dollar?
Two of the most popular reasons why you’d consider shorting the US dollar are:
- You think that the US dollar price is overvalued and will fall
Let’s say you’re following the news and events that affect the British pound and the US dollar. You believe GBP’s price will rise and devalue USD, so you decide to short (sell) the dollar. If your prediction is correct, you’ll make a profit – if not, you’ll make a loss
- You want to short USD as a hedging strategy
If you have existing positions that are impacted by US dollar price movements, you could short the currency as a hedging strategy. Inflation also erodes currency value, and traders often use shorting to hedge against it
What moves the price of the US dollar?
- Monetary policies
All countries’ central banks will implement monetary policies to either increase or decrease inflation rates. The bank may, for instance, lower interest rates to encourage people to borrow money. Borrowed dollars eventually get spent by consumers and businesses, which stimulates the economy. At the same time, lowering interest rates weakens the dollar, which can lead to a fall in its value
- Inflation rates
Inflation is the increase in the cost of goods and services in an economy. When the US inflation rate rises, USD’s value will fall. This is because higher inflation means the cost of goods and services in the country is rising.
Inversely, a falling inflation rate will increase the US dollar’s value as goods and services become cheaper and more attractive for other nations to buy – thus pouring money into the economy and strengthening the dollar
- Demand for the dollar
A country can ensure its currency stays in demand by exporting products that other countries want to buy, and demanding payment in that country’s native currency. The US dollar is what’s known as a reserve currency. This means it’s used by nations across the world to buy commodities, meaning demand for it will also be high.
If another country, eg China, manages to attain reserve currency status for its local tender, this could negatively impact the desirability of the US dollar – which will cause its value to drop
- Slowing growth
The US dollar’s value will rise or fall depending on how the US economy is growing. A weak economy will lead investors to withdraw and take their money elsewhere
Risks when short-selling US dollar markets
- As you’re trading on leverage, losses are amplified – and could significantly outweigh your margin amount. It’s very important to attach stops to your position, which lock in a maximum amount you’re willing to lose
- A rise in the US dollar may cause short sellers to rush to exit their positions, causing a ‘short squeeze’. This drives the price of the currency even higher.
- Several levels of investment risks are inherent in foreign investments, such as political risk, taxation, and currency risk. You can reduce the risk of loss from fluctuations in exchange rates by hedging currency futures
Shorting the US dollar summed up
- Going short means that you are trading against the US dollar – ie that its value will go down
- With us, you can go short on the US dollar using CFDs. You won’t own any currency, but you can make a profit or loss from currency price movements
- Monetary policies, increased inflation rates, competition from other reserve currencies and slowing economic growth are some of the factors that may cause the US dollar to depreciate in value
- Some of the risks of shorting the USD include theoretically unlimited losses and getting caught in a short squeeze
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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