Betting on US Dollar Similar to Playing Blackjack
Mar 29, 2014
Those placing bets on the growing strength of the dollar have been disappointed.
At the beginning of this year the Federal Reserve began the process of “tapering,” reducing the amount of government bonds it purchases. This caused interest rates to rise in the US. This should indicate a strengthening of the dollar for two reasons: #1 higher interest rates reduce the risk of inflation, building confidence in the dollar, and #2 higher rates mean a higher return on dollar-denominated investments, so demand for dollars should increase.
Forex trading a game of luck and skill
But those who expected the dollar to strengthen have been disappointed. Forex trading is like casino strategy; sometimes making the right decisions doesn’t bear fruit. The Euro and Pound Sterling have actually gained relative to the dollar this year.
The currency speculation game can be compared to blackjack. When playing blackjack cards you assess the current situation to predict what will happen next. If you have a sixteen and the dealer shows a seven or higher you hit, because your chances of winning are high.
When interest rates are rising you usually invest in that currency, because most logic says that the exchange rate should strengthen. But just as in blackjack basic strategy sometimes doesn’t work, in forex trading sometimes other forces are at play.