Why Currencies Matter to Youhttp://www.fool.com/investing/international/2010/08/19/why-currencies-matter-to-you.aspx Dan Caplinger
August 19, 2010
When you think of a risky investment market, stocks immediately come to mind. Yet amid a turbulent roller-coaster ride for stocks lately, the currency markets have seen even more volatility in recent months. The dollar's big moves could have a big impact not just on the investors who trade currencies but also shareholders of ordinary companies.
Where the dollar's been
Then, of course, came the European sovereign debt crisis, which sent the euro tumbling from $1.50 to below $1.20 in early June. As investors realized that the European Union faced many of the same challenges as the U.S., confidence in the dollar rose, at least in relative terms. That made those who bought dollar-bullish ETFs like the anti-euro UltraShort Euro ProShares (NYSE: EUO ) and PowerShares DB US Dollar Index Bullish (NYSE: UUP ) quite happy, but sent Europe-centered currency ETFs CurrencyShares Euro Trust (NYSE: FXE ) and CurrencyShares Swiss Franc Trust down sharply.
In just the past couple of months, though, the dollar has given up a good chunk of those gains. So what's going on, and how can you predict what the next move for the dollar will be?
Navigating the crosscurrents
These factors interplay in ways that are hard to predict. For instance, carry trade investors borrowing U.S. dollars made money for quite a while, but when the dollar bounced back, they took a quick beating, pushing some to cover their positions. Given that many forex traders use immense amounts of leverage when they take positions, the forex markets can be extremely volatile and respond quickly to changing conditions.
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