Why Indian and Asian Traders Need to Watch Dollar Moves: Insights from Octa Broker

The US dollar holds a significant influence on global markets, especially for traders in India and Southeast Asia.

This article highlights the critical importance of monitoring the value of the dollar and explores how its fluctuations affect currency pairs, commodity prices and market strategies in the region.

The dominance of the US dollar in global trade and finance is unparalleled. About 88% of all foreign exchange transactions involve the US dollarsolidifying its position as the backbone of international markets. For traders in Asia – particularly India and Southeast Asia – understanding dollar 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 essential for traders to stay informed. The strength of the US dollar can affect trade balances, foreign reserves and inflation rates, particularly in countries that rely heavily on USD-priced imports such as India, Indonesia and Malaysia. With fluctuations in the value of the dollar reshaping 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, accounting for more than 40% of global transactions, including key commodities such as oil and gold. From 2023, approximately 59% of the world’s foreign exchange reserves were held in US dollarsemphasizing its unparalleled importance.

For traders in Asia, the dollar’s status as another 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, leading to inflation. Conversely, when the dollar weakens, local currencies strengthen, potentially hurting export industries, especially commodity-heavy economies like Indonesia and India.

How traders in Asia and India can benefit

Monitoring dollar movements allows traders in India and Southeast Asia to better anticipate currency fluctuations. In 2022, for example, the Indian rupee hit an all-time low against the dollarexacerbating import costs and putting pressure on the country’s foreign exchange reserves. Understanding these dynamics allows traders to hedge their risks more effectively and make data-driven decisions when trading currency pairs or commodities.

Dollar impact on key currency pairs for Asian traders

Fluctuations in US dollar-based currency pairs have a significant impact on traders in Southeast Asia. Given the dollar’s status as the dominant global currency, its value influences a variety of currency pairs. However, traders don’t just have to follow the dollar. 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 substantial influence. A rise in interest rates generally strengthens the dollar, causing dollar-based currency pairs to depreciate against other regional currencies, so the exchange rate rises in direct currency quotes and falls in indirect currency quotes (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 a more accommodative monetary stance or reductions in dollar rates usually weaken the dollar, creating opportunities for traders to profit from the appreciation of various currencies against it.

An example of the dollar’s global influence is the USDJPY pair, which saw significant volatility during the Federal Reserve’s rate hikes in 2022-2023. As the dollar strengthened, the Japanese yen weakened, hitting a 24-year low in October 2022. This was primarily due to the divergence between US and Japanese monetary policies, with the US taking a dovish stance, raising interest rates, while Japan kept interest rates ultra-low. As a result, traders who have been watching these developments closely could capitalize on the widening interest rate differential between the two currencies.

Similarly, in 2022, the US dollar strengthened considerably due to rising US interest rates and global uncertainty, causing the euro to fall below parity for the first time in 20 years. The strengthening dollar, driven by inflationary pressures and aggressive Federal Reserve policies, resulted in significant opportunities for traders who followed these moves closely.

Data from McKinsey’s Southeast Asia Quarterly Economic Review points out that in the second quarter of 2024, regional economies faced volatility closely linked to fluctuations in the US dollar. Specifically, inflationary pressures in the US contributed to currency depreciation in Southeast Asia, particularly affecting countries such as Malaysia and Indonesia. Several key indicators, including US interest rates, inflation data and the trade balance, have driven this volatility. These factors created a dynamic trading environment where Southeast Asian currencies were sensitive to changes in the value of the dollar. By monitoring these economic indicators, such as the Federal Reserve’s monetary policy, inflation trends, and key employment data, traders can better anticipate movements in currency pairs and strategically position themselves to capitalize on potential gains or mitigate risks.

Market Examples: How a Strong Dollar Affects Asian Markets

In India, a strong US dollar has historically led to higher import costs, particularly for oil priced in dollars. For example, when the dollar strengthened in 2022, India’s crude oil import bill increased, contributing to a record trade deficit of $267 billion by the end of the fiscal year. In turn, it pushed up inflation and further weakened the rupee, leading to significant market volatility.

The strength of the dollar has also had a profound impact on Southeast Asia. In Indonesia, for example, a strong dollar makes imports more expensive, which increases inflation and affects purchasing power. In 2023, Indonesia saw its inflation rise to 6%, partly due to a stronger dollar driving up import costs for energy and food commodities. Monitoring these movements allows traders to capitalize on short-term opportunities in volatile markets.

Kar Yong Ang, financial market analyst at broker Octa, says: “The strength of the US dollar often reverberates through Asian markets, affecting everything from local currency valuations to commodity prices. Traders who actively track dollar movements can spot opportunities in volatile markets and make more strategic trades.’

Reasons why Southeast Asian traders should always follow the dollar

1. Global reserve currency: The US dollar remains the dominant global reserve currency, with around 59% of the world’s foreign exchange reserves held in dollars. This means that changes in the value of the dollar affect almost every economy globally.

2. Volatility of the key currency pair: In Southeast Asia, key currency pairs involving the US dollar are central to regional transactions. 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 due to positive US economic data, traders can take advantage of opportunities in other currencies by shorting regional pairs to benefit from weakening local currencies.

3. Impact on commodity prices: Many essential commodities, including oil and gold, are priced in dollars. For traders in export-based economies such as Indonesia, even small movements in the dollar can significantly affect market prices.

4. Influence on interest rates: The strength of the dollar often causes changes in interest rates in countries such as India and Malaysia, which has a direct impact on borrowing costs and economic growth.

Why chasing the dollar is non-negotiable for traders

For traders in Asia and India, understanding the movements of the US dollar is not only a strategic advantage, it is a necessity. Dollar 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 changes are impacting 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 crucial to maintaining profitability and capitalizing on global economic trends to everyone’s advantage.

Octa is an international broker offering online trading services worldwide since 2011. It offers commission-free access to financial markets and various services already used by clients from 180 countries who have opened more than 42 million trading accounts. Their free educational webinars, articles and analytical tools help clients achieve their investment goals.

The company is involved in a comprehensive network of charitable and humanitarian initiatives, including improving educational infrastructure and short-term relief projects that support local communities.

In the APAC region, Octa received the “Most Secure Broker Indonesia 2022” and “Most Reliable Broker Asia 2023” awards from International Business Magazine and Global Forex Awards respectively.