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Can equity market crash crush the US Dollar?
Written by: PaxForex analytics dept - Monday, 22 June 2015 0 comments
Those forex traders who frequently tune into business news channels such as CNBC or Bloomberg in order to keep up with fundamental developments, geopolitical events and other interesting business news stories may have pick up that the strong rally in the S&P500 and other US equity markets is the most hated rally in the US. Some call it yet another bubble which will burst and while the equity markets remain in an uptrend, the hatred increases.
As you all know, nothing can go up in one straight line forever. The rally in US equity markets has now lasted over six years without a major correction which may suggest that we are simply getting closer to a reversal. While forex traders may not pay attention to equity price action as they are focused on the forex market, but the same fundamental reports impact equity markets as they do forex markets and therefore the US Dollar could feel an impact from a crash in the equity markets.
A recession will drop the equity markets, but the US Dollar will also be punished by traders. The same holds true for any other major economic
report. The biggest divergence may be the US Federal Reserve as what equity traders will cheer as a bullish monetary policy may be bearish for the US currency. With this exception in mind, a stock market crash will not only hurt confidence and result in an outflow of money from the US, but it could also depress the US Dollar.
Therefore it is always important to keep up with developments which may not have a direct influence on the forex market as we live in a connected world and what happens in one sector of the financial market can have an impact on another sector. Should fear about US economic growth increase the equity market will drop and the US Dollar will follow. Sometimes a drop in equity markets can lead to a drop in the currency.
A good forex trader always remains informed about the state of the global financial system. It does not matter if it impacts the currency pair directly, it is important to understand how different market correlate with each other in order to increase profitability. Keeping a close eye on what the US equity market does could give away insights about what the US Dollar may do and forex traders should at least be aware of this.