The dominance of the US dollar in global trade and finance is unparalleled. About 88% of all currency transactions involve the US dollarthus strengthening its position as the backbone of international markets. For traders in Asia – especially India and Southeast Asia – understanding the dollar’s movements is not only advisable; it is essential.
Changes in the value of the dollar affect everything from commodity prices to interest rates, making it crucial for traders to stay informed. The strength of the US dollar can affect the trade balance, foreign reserves and inflation rates, especially in countries that rely heavily on imports priced in USD, such as India, Indonesia and Malaysia. With fluctuating dollar values changing market dynamics, anticipating these moves can make or break a trader’s strategy.
The Global Influence of the US Dollar: Why It Matters
The US dollar is the dominant currency in international trade more than 40% of global transactionsincluding important raw materials such as oil and gold. From 2023 onwards, approximately 59% of the world’s foreign exchange reserves were held in US dollarswhich underlines its unparalleled importance.
For traders in Asia, the dollar’s status as a reserve currency means any fluctuation can have a ripple effect across multiple markets. When the dollar strengthens against local (Asian) currencies, imports become more expensive, which stimulates inflation. Conversely, when the dollar weakens, local currencies strengthen, potentially negatively impacting export industries, especially commodity-heavy economies such as Indonesia and India.
How traders in Asia and India can benefit
By monitoring the dollar’s movements, traders in India and Southeast Asia can better anticipate currency movements. For example, in 2022 the Indian rupee reached an all-time low against the dollarincreasing import costs and putting pressure on the country’s foreign reserves. By understanding these dynamics, traders can more effectively hedge risks and make data-driven decisions when trading currency pairs or commodities.
Impact of the dollar on major currency pairs for Asian traders
Fluctuations in US dollar-based currency pairs have significant implications for traders in Southeast Asia. Given the dollar’s status as the dominant global currency, its value affects a variety of currency pairs. However, it’s not just the dollar that traders should pay attention to. Other factors, such as regional economic policies, local inflation rates and trade relations, also influence currency values.
For example, the US Federal Reserve’s decisions on interest rates have a… substantial influence. An interest rate increase generally strengthens the dollar, causing depreciation of dollar-based currency pairs against other regional currencies, so that the exchange rate rises for direct currency rates and falls for indirect currency rates (such as AUDUSD and EURUSD). Therefore, Southeast Asian traders should closely monitor these developments to adjust their strategies accordingly. On the other hand, a shift to looser monetary policy or interest rate cuts typically weakens the dollar, creating opportunities for traders to take advantage of the appreciation of various currencies against the dollar.
An example of the dollar’s global influence is the USDJPY pair, which saw significant volatility during the Federal Reserve’s 2022-2023 rate hikes. As the dollar strengthened, the Japanese yen weakened, reaching a 24-year low in October 2022. This was mainly due to the difference between US and Japanese monetary policies, with the US taking an aggressive stance and raising interest rates, while Japan maintained ultra-low interest rates. As a result, traders who closely followed these developments were able to take advantage of the widening interest rate differential between the two currencies.
Similarly, the US dollar strengthened significantly in 2022 due to rising US interest rates and global uncertainty, causing the euro to depreciate. fell below parity for the first time in twenty years. The strengthening of the dollar, driven by inflationary pressures and aggressive Federal Reserve policy, resulted in significant opportunities for traders who closely followed these moves.
Data from McKinsey’s Southeast Asia Quarterly Economic Review shows that in the second quarter of 2024 regional economies experienced volatility closely linked to fluctuations in the US dollar. More specifically, inflationary pressures in the US contributed to the depreciation of the currency in Southeast Asia, mainly affecting countries such as Malaysia and Indonesia. Several key indicators, including US interest rates, inflation data and trade balances, drove this instability.
These factors created a dynamic trading environment in which the currencies of Southeast Asia were sensitive to shifts in the value of the dollar. By keeping an eye on these economic indicators, such as Federal Reserve monetary policy, inflation trends, and key employment data, traders can better anticipate moves in currency pairs and strategically position themselves to take advantage of potential gains or limit risk.
Market Examples: How a Strong Dollar Affects Asian Markets
In India, a strong US dollar has historically led to higher import costs, especially for oil priced in dollars. For example, as the dollar strengthened in 2022, India’s crude oil import bill soared, contributing to a record high trade deficit of $267 billion by the end of the fiscal year. In turn, it pushed inflation higher and further weakened the rupee, leading to significant market volatility.
The strength of the dollar has also had profound effects on Southeast Asia. In Indonesia, for example, a strong dollar makes imports more expensive, which increases inflation and affects purchasing power. In 2023, Indonesia experienced its inflation increase to 6%partly due to a stronger dollar driving up import costs for energy and food commodities. By following these movements, traders can take advantage of short-term opportunities in volatile markets.
Kar Yong Ang, a financial market analyst at Octa Broker, says: “The strength of the US dollar often reverberates across Asian markets, influencing everything from local currency valuations to commodity prices. Traders who actively monitor dollar movements can identify opportunities in volatile markets and execute more strategic trades.”
Reasons why Southeast Asian traders should always follow the dollar
- Global reserve currency: The US dollar remains the dominant global reserve currency, with approx 59% of the world’s foreign reserves are held in dollars. This means that changes in the dollar value affect almost every economy worldwide.
- Volatility of major currency pairs: In Southeast Asia, major currency pairs involving the US dollar are critical in regional trade. The value of these pairs fluctuates based on factors such as US economic performance, global commodity prices and geopolitical developments. For example, when the dollar strengthens on positive US economic data, traders can take advantage of opportunities in other currencies by shorting regional pairs to take advantage of the weakening of local currencies.
- Impact on commodity prices: Many essential commodities, including oil and gold, are priced in dollars. For traders in export-driven economies like Indonesia, even small movements in the dollar can significantly affect market prices.
- Influence on interest rates: The strength of the dollar often leads to changes in interest rates in countries like India and Malaysia, which directly impacts borrowing costs and economic growth.
Conclusion: Why tracking dollars is non-negotiable for traders
For traders in Asia and India, understanding the movements of the US dollar is not only a strategic advantage, but also a necessity. The dollar’s fluctuations directly affect currency pairs, commodities like oil and gold, and regional interest rates, creating both risks and opportunities.
By integrating dollar tracking into their trading strategy, traders can gain insight into how these shifts impact their markets, allowing them to make calculated and timely adjustments to their portfolios. In such a dynamic and interconnected financial environment, staying ahead of these changes is critical to maintaining profitability and using global economic trends to your advantage.
About Octa
Octa is an international broker offering online trading services worldwide since 2011. It offers commission-free access to financial markets and a variety of services used by customers from 180 countries who have opened more than 52 million trading accounts. To help its clients achieve their investment goals, Octa offers free educational webinars, articles and analytical tools.
The company is involved in an extensive network of charitable and humanitarian initiatives, including improving education infrastructure and short-term aid projects to support local communities.
Since its founding, Octa has won more than 70 awards, including the ‘Best Forex Broker 2023’ award from AllForexRating and the ‘Best Mobile Trading Platform 2024’ award from Global Brand Magazine.