Dollar Dependency

Your portfolio of forex positions may have a slight problem: it may be plagued by dollar dependency. With most forex brokers now offering the ability to hold balances in any number of currencies, it might be wise to diversify your account balances.

Forex and the Dollar Dependency

The US dollar is the currency most actively traded on the foreign exchange markets, and as a result, many traders choose to keep their currency in dollar-denominations, regardless of their own local currency. Dollar dependency, however, puts your account balance in jeopardy, as a small move in exchange rates can affect your spending power locally.

In addition, by selecting only one major currency, you miss out on opportunities to profit from carry interest. At the time of writing, and for many years prior, the US dollar has been one of the least expensive currencies to hold. The Euro, backed by the ultra-conservative European Central Bank, has been one of the highest yielding of all developed countries. The difference between the US dollar and the Euro dollar has been dramatic, as the Euro has risen more than 50% against the dollar, all the while providing higher carry rates.

Carry interest does make quite a difference over the long haul. A number of forex brokers that cater to day traders offer daily compounded interest. That is, at the end of the day, carry interest is credited or debited for open positions, and in many times, is also credited for the balances you hold in your own account.

A Euro denominated account pays .85% per year in 2010, which is more than five times higher than a dollar denominated account which pays only .15% per year. Indeed, there is quite a difference for those who have dollar dependency in their forex portfolios. For those with larger balances, a multiple currency set up makes sense, as you'll be able to ride out short term fluctuations and generate more carry interest, and you may even churn minute capital gains profits by holding what is effectively a very unleveraged forex position.

Diversify Your Balances

Diversifying your balances within a forex trading account is a great way to diversify against long term swings and provide a hedge against long term price fluctuations, even if you're day trading. Day traders very often do not have a proper allocation into other currencies, since they are only in the market for a fraction of the time as a long term trader. However, even day traders can benefit from reducing their dollar dependency.

Take the time to reassess your balances and your trading habits, and you soon might find that your trading accounts suffer from severe dependency on only one currency.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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