Is now the best time to hedge US dollar exposure?

Key points

• USD lost over 200 pips to GBP and 150 pips to EUR in one day (November 14th)
• Overnight interest rates are likely to fall in 2024
• Traders may look to USD/JPY if interest rate differentials start to converge

US dollar weakens as interest rates projected to fall

The U.S. dollar, which has seen historically high prices against major currencies in recent years, is starting to weaken as inflation decreases and interest rates approach a plateau. On November 14th, US dollar experienced its worst day of the year against the pound and euro, losing over 200 pips against the pound alone.

The recent weakening of USD can be attributed to the projected fall in interest rates. According to the CME Group, there is a high likelihood of rate cuts in the U.S. by the end of 2024. Historically, US rates have fallen faster than expected during economic crises, such as the pandemic and the financial crisis of 2008. If rates in the US continue to decline, it could impact the demand for foreign exchange and potentially lead to a decrease in the value of the US dollar.

Traders should consider the current landscape of global interest rates, as higher rates in certain regions can strengthen their respective currencies. Under this line of thinking US dollar's strength against the yen is being questioned, as a potential rate cut in the US could bring the divergence in interest rates closer together.

It is worth noting that a majority of traders are currently short on the US dollar, indicating a belief in a reversion to more normal prices. This sentiment further adds to the uncertainty surrounding the future of the US dollar in the foreign exchange market.

How to trade US dollar

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex provider like IG. USD pairs can be found in IG's platform under the 'USD Pairs' pairs tab. Many traders also watch major forex pairs like GBP/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 IG’s Trading Academy. 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.