The Forex market is largely hinged on the value of the US dollar, as 90% of the trades on the Forex market include this currency. Investors and traders alike must be educated about the political factors affecting the US dollar, especially the factors that affect the strength of the US economy and the foreign debt growth.
1. Wars Abroad and Terrorist Fears At Home. Consumers are weary of spending when they are unsure of their own personal safety– they go into “survival mode” and only purchase necessities. This affects economic growth and stunts bank lending as less money is needed to be borrowed. As touched on by Ann Berg in this article, the government also allocates money for wars and defense that would otherwise go to boosting the economy in job creation. Finally wars increase the national debt and the likelihood of defaulting on such debt.
2. Consumer Tax Cuts = More Spending. With each administration, tax cuts vary depending on how “hands-on” they think a government should be. These tax cuts, generally favored by the right wing political groups, encourage consumer spending that boosts the economy as well as the economies of other countries. Foreign country exports rise when Americans are willing to spend more money because foreign goods are generally less expensive.
3. National Debt is over $9 Trillion. To give some perspective, all of the money traded internationally on the Forex daily is only a quarter of the US national debt of over $9 Trillion USD. Foreign investors are turned-off to the idea of putting their money into the US because they see that future generations will have to suffer the affects of outlandish debt. Private sectors will also be looked to for help in the clean-up. However keeping track of the US debt in relation to how much the US has against how much it is spending will give a good picture of potential dollar value.
4. Too Much Debt Causes Default. Defaulting on Debt Causes Risk. When a government defaults on its debt, which it will if there is too much of it, the lending and borrowing risks are raised and the dollar consequently goes far down. However, because the US continues to find ways to pay back its debts, the dollar might be able to stay strong.
5. Stay Aware of Elections. Each new political figure brings in a certain amount of foreign and local support that translates either to high dollar request or little dollar attraction. As seen with the Obama administration, the beginning of his term swept across the world and the dollar had a nice run. However, with the Bush administration before him, the dollar also had a good run because he was in favor of lowering taxes, which led to more of a free market.
Being aware of political events will give ever investor an edge on comprehending the foreign exchange Forex market on a much deeper and more educated level.
