Trading in the US Dollar: what must you know before investing in the $

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Generally, when it comes to dealing in the currency market, the spot market segment is often ignored by regular traders. The participants in the currency spot market (like the USD-INR spot market) include banking and financial institutions, central banks of various countries, corporates and international travelers. The currency derivatives segment, on the other hand, is where the traders like you engage in large numbers along with the other participants listed above. 

Okay, now that we’ve laid a foundation, let’s talk about the most dominant currency in the entire world - the United States Dollar. 

The USD: An overview

As you might already know, the US Dollar (USD) is one of the most sought after currencies in the entire world. It is considered to be a benchmark currency and is used internationally. Also, the USD is one of the safest currencies to invest in. In fact, the central banks of most countries, including the Reserve Bank of India, carry it as a reserve currency and conduct international transactions with it.

Even in the forex markets, the USD is the sole dominating currency. Be it the currency spot market (like the USD-INR spot), the currency futures market, or the currency options market, the USD is everywhere. Now that you’ve gotten a fair idea of how important the USD is, let’s take a look at some things that you need to know before you get into USD-INR trading.  

What you must know before investing in the USD

One of the ways in which you can invest or trade in the USD is through the USD-INR currency pair. Before we talk about how you can trade in the USD, it is important to be aware of the derivative contract specifications.   

Derivative specifications of the USD-INR currency pairs 

The following tabulated specifications of the USD-INR derivative contract can help throw some light into the way the USD is traded in the currency market. So, take your time and read through the list. 

Particulars

USD-INR

Base currency

USD

Quote currency

INR

Lot size

$1,000

Value expressed as

1 USD expressed in INR

Tick size

INR 0.0025

Trade timings

Monday to Friday, from 9AM to 5PM 

Derivative contracts

You get access to 12 monthly contracts

Date and time of last derivative trade 

Derivative trading stops at 12.30 PM, two days before the last working day of the month   

Final settlement day 

Last working day of the month

USD-INR price at settlement 

RBI reference rate on the final settlement day

The USD is the most traded currency 

The demand for the dollar in the currency market is massive. So massive that if you were to make a list of the most widely traded currency pairs, you’d see that the USD is a part of every single currency pair in your list. For instance, the EUR-USD, GBP-USD, USD-CHF, USD-JPY and USD-CAD are a few of the most traded currency pairs. See how the USD is a part of every single pair?

The huge demand for this currency gives the USD an exceptional amount of liquidity. In fact, it is one of the most highly liquid assets in the world. Thanks to the high liquidity in the counter, buying and selling the currency is very easy. Also, the bid-ask spreads with the USD are also generally very tight. 

The USD is a very stable currency 

Compared to other global currencies like the Pound Sterling, the Indian Rupee, and the Japanese Yen, the value of the USD is relatively less volatile. This is primarily due to a combination of factors such as heavy demand for the currency and the political and economic stability of the currency’s home country. Low volatility and high stability of the USD essentially means that the USD-INR price movements in the counter do not experience wild swings. 

The movement of USD is closely linked to the Federal funds rate

The USD enjoys a very close link with the Federal funds rate of the United States of America. The Federal funds rate is the equivalent of the Reserve Bank of India’s repo rate. Any change, whether positive or negative, has an impact on the price movement of the USD. For instance, if the Federal funds rate is decreased, the USD is likely to fall since it effectively translates to more dollars circulating in the economy, thereby lowering the demand.   

The stock market and the USD are inversely linked 

The USD is widely regarded by many to be a safe-haven asset. Therefore, when the stock markets take a beating, traders would naturally converge to buy more dollars in the currency market, thereby driving the demand and the price of the asset up. This is because the USD is seen as a safer alternative investment than stocks. Similarly, when the stock markets are rallying, the demand and the price of the USD tends to decrease slightly. This is due to the higher rate of return that equity markets offer.     

Wrapping up

Well, that was mostly the theoretical aspect of the USD-INR trading segment. Knowing these can help cement your basics, so you can build upon this knowledge with more practical details. And that’s just what our next chapter ventures into. There, we’ll deal purely with the USD-INR pair and take an in-depth look at how to trade in the derivatives segment of the currency pair. 

A quick recap

  • The US Dollar (USD) is one of the most sought after currencies in the entire world. It is considered to be a benchmark currency and is used internationally. 
  • Even in the forex markets, the USD is the sole dominating currency. Be it the currency spot market, the currency futures market, or the currency options market, the USD is everywhere.
  • One of the ways in which you can invest or trade in the USD is through the USD-INR currency pair.
  • The USD-INR derivative contract has certain specifications.
  • The USD is the most traded currency. It is also a very stable currency. 
  • The movement of USD is closely linked to the Federal funds rate.
  • But the stock market and the USD are inversely linked.
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