There are various reasons why a lot of traders flock to the Forex market in an attempt to cash in on the profits that it offers, one of which is that it is the largest financial market in the world where trillions of US Dollars are traded daily.
Retail clients, who trade Forex, contribute almost 5% of the total volume on the Forex market, which is around $250 million in daily turnover. Forex has a lot that it offers to all types of traders, and the reasons to trade Forex are numerous.
When considering that 2020 has been one of the most difficult financial years experienced on a global scale and there may be a financial crash looming, even more traders are weighing their investment options to more liquid assets.
The Forex market offers traders with high levels of volatility, easy access, advanced technology, the option to practice trading, various ways in which to trade, and endless possibilities.
Covid-19 and its impact on the global financial front
2020 has been an excruciating year on the global financial front with the emergence and rapid spread of Covid-19. With the declaration of the virus as a global pandemic, the world all but came to a halt as business closed their doors and countries went under lockdown.
All these efforts have been in an attempt to curb the spread of the virus, but at what cost? With economies at a standstill, the markets have seen substantial impacts due to operational halts as people were confined to their homes and only essential services were, for the greater part, allowed to operate.
Stocks plummeted; some businesses were forced to close their doors permanently while others saw their net income shrinking. There were, however, numerous businesses with adequate cash flow to withstand the blow, and others have risen as flagships despite financial duress says Analysts at Forexsuggest.com – An investment platform.
What is a dollar collapse?
A dollar collapse occurs when the United States Dollar plummets and loses its value. When this occurs, investors who hold assets which are denominated in dollars will most likely sell them at any cost.
Should this occur, all financial markets will be implicated where dollar-denominated assets are concerned from Forex, to shares, foreign governments who own U.S Treasuries, foreign exchange futures traders, and more especially, individual investors.
Should the crash occur, investors such as these will demand assets which are denominated in any other currency but the dollar, which will rapidly decrease the value on the dollar which would result in a number of catastrophic consequences.
Which conditions may result in a Dollar collapse?
Despite many existing factors which can lead to a Dollar collapse, there are two main conditions that have to fall in place for it to potentially collapse, these are:
- Underlying weakness, and
- Viable currency alternative
There are currently underlying weaknesses experienced by the Dollar when considering that the United States savings has experienced a shortfall pre-Covid-19. During the first quarter of 2020, Net National Savings fell to 1.4% of National income, the lowest it has been since 2011.
The Net National Saving includes depreciation-adjusted savings of households as well as businesses, and the government sector. Due to a lack in domestic saving, and the strive for investment and growth, the United States subsequently took advantage of the Dollars role as the primary reserve currency.
This subsequently led to the United States drawing heavily on surplus savings from abroad resulting in running a deficit in the current account of the United States which is the broadest measure of trade as it includes investment.
When considering a viable currency alternative, it is necessary to look towards the stronger contenders against the United States, the Euro, which only comprises 21% of central bank reserves.
Considering that these two conditions are needed in order for the dollar to crash, it is not likely that it is bound to crash, although there are numerous factors leading up to a financial and economic crash which have been substantiated over the past few months.
Why is it important to have a Forex account should the dollar crash?
Despite the economic circumstances and events that have occurred in 2020, the Forex market has remained the largest market of them all. There has been a great influx in Forex traders over the past few months as investors have turned towards currencies as viable options for investments.
It is imperative for investors to ensure that they diversify their portfolios with rumours and signs of an impending crash, including non-dollar-denominated currency assets, commodities, and precious metals such as gold.
A Forex account also provides traders with access to trade in safe-haven currencies to protect traders against fundamental disruption. These currencies either retain or increase in value when there are times of uncertainty and market instability such as the Japanese Yen, Swiss Franc, Euro, and more.
Final Thoughts
As a rule of thumb, traders need to ensure that they have risk management protocols in place that protect them not only from the risks of trading activities themselves, but also in case of economic crisis, market and financial crashes, and currency crashes.
Traders are always advised to ensure that they have diversified portfolios to ensure that should one market show uncertainty or crash, they can make up for collateral through other investments.
Although there are a lot of signs showing that there is an impending financial crash along with a dollar crash, investors and traders are urged to keep up to date with economic news and avoid emotional or panic trading.
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